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Personal Loan vs. Personal Line of Credit: How to Choose

Personal loans and personal lines of credit are similar financing options, but differ when it comes to funding, interest rates, repayment, and more.

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By Erin Gobler

Written by

Erin Gobler

Freelance writer, Credible

Erin Gobler has covered personal finance for more than 10 years, with expertise on mortgages, student loans, and credit cards. Erin's work has been featured by Fox, USA Today, Business Insider, GOBankingRates, Newsweek Vault, CNN, and Forbes Advisor.

Edited by Jared Hughes

Written by

Jared Hughes

Writer, Fox Money

Jared Hughes has spent more than eight years covering personal finance, with bylines at the New York Post and NewsBreak.

Reviewed by Meredith Mangan

Written by

Meredith Mangan

Senior editor, Fox Money

Meredith Mangan is a senior editor at Fox Money and expert on personal loans.

Updated June 20, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

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When you need to borrow money, whether it be for debt consolidation or a large purchase, you have plenty of options, including various types of credit cards, loans, and lines of credit. Two of the most popular borrowing tools are personal lines of credit and personal loans.

Both personal lines of credit and loans are types of unsecured debt that allow you to borrow small and large sums of money, often at competitive interest rates. But which option is right for you? It depends on what you need the money for and what type of repayment you’re most comfortable with.

What is a personal loan?

A personal loan is a type of installment loan. You borrow a lump sum of money and then pay it back in monthly installments. Personal loans have the following features:

  • Interest rates: Personal loans most often have fixed interest rates, meaning your interest rate (and, therefore, your monthly payments) won’t change during your loan term. Rates on personal loans are often slightly lower than on personal lines of credit.
  • Loan amounts: The amount you can borrow on a personal loan depends on your credit score and income. Loan amounts can range from as low as $600 to as high as $100,000, depending on your lender.
  • Repayment terms: Personal loans have repayment terms that can last from 1 to 7 years. Thanks to the fixed interest rates, your loan payments will also be fixed. The shorter your loan term, the higher your payments will be.
  • Funding: Unlike a personal line of credit, you can’t draw funds from a personal loan. Instead, your loan will be funded in one lump sum when your loan is approved. Depending on your lender, funding could take between 24 hours and a week.
  • Unsecured vs. secured: Personal loans can technically be either unsecured or secured. A secured loan is one that has collateral, like your house or car. However, most personal loans are unsecured, meaning you aren’t required to provide an asset to use as collateral.

Learn More: What Is a Personal Loan?

What is a personal line of credit?

A personal line of credit is a lending tool that allows you to draw your funds multiple times up to a maximum credit limit. A personal line of credit has some of the following features:

  • Revolving credit: Like a credit card, a personal line of credit is a form of revolving credit. Rather than receiving money just once, you can borrow from it again and again, as long as you don’t exceed your credit limit.
  • Interest rates: Personal lines of credit usually have variable interest rates, meaning your rate can increase or decrease based on market conditions. Rates are generally higher than you’d pay on a personal loan, but lower than rates on credit cards.
  • Credit limits: As with other borrowing tools, your credit limit on a personal line of credit is based on your credit score and your ability to repay. Amounts often range from a few thousand dollars to $50,000.
  • Draw period: Instead of a lump sum payment upfront, personal lines of credit allow you to draw your funds during a draw period. You can take out as much money as you need, up to your set credit limit. Once the draw period closes, the repayment period starts.
  • Repayment period: Unlike personal loans, personal lines of credit don’t have set repayment periods. However, Your minimum monthly payment may be based on a percentage of your current balance, or even just your interest.
  • Funding: You’re approved for a certain credit limit but don’t automatically receive that amount. It’s there whenever you want to borrow from it, as long as you have some of your credit limit available. However, you may pay a small fee each time you borrow.

Explore: Pros and Cons of a Personal Line of Credit

Personal loan vs. personal line of credit

Personal lines of credit and personal loans have some important similarities. 

For example, both are most often unsecured and can be used for nearly any purpose

However, they also have some important differences. The best option for you depends on your personal financial situation and how you plan to use the funds.

Personal line of credit
Personal loan
Type of credit
Revolving
Installment
Loan amounts
$500 to $50,000 (on average)
$600 to $100,000
How to qualify
  • Good to excellent credit
  • Verifiable income
  • Good to excellent credit
  • Verifiable income
  • Interest rate
    Variable
    Fixed
    Loan term
    Open ended
    1 to 7 years (depending on the lender)
    Fees
    Depending on the lender, could include:
  • Annual fees
  • Draw fees
  • Late fees
  • Overdraft fees
  • Depending on the lender, could include:
  • Application fees
  • Origination fees
  • Prepayment penalties
  • Late fees
  • Funding
    Ongoing access
    One-time lump sum
    Best for
    Ongoing expenses, such as:
  • Medical expenses
  • Home renovations
  • Moving costs
  • One-time expenses, such as:
  • Debt consolidation
  • One-off emergencies
  • Large purchases
  • Pros and cons of a personal loan

    Here are the benefits and drawbacks of a personal loan.

    Pros

    • Large loan amounts: Personal loans often come in higher amounts than personal lines of credit. Depending on your lender and credit profile, you can borrow up to $100,000.
    • Competitive interest rates: Personal loans have competitive interest rates, especially for borrowers with good credit. Rates are often lower than on personal lines of credit.
    • Fixed rates and payments: Personal loans have fixed interest rates, meaning you’ll have fixed monthly payments and will never see your rate go up.

    Cons

    • Only borrow once: Unlike a personal line of credit, you can’t borrow from a personal loan multiple times. If you need more money, you’ll have to get another loan.
    • Fees may apply: Personal loans may have fees such as origination fees, application fees, prepayment penalties, and more.
    • Higher monthly payment: Because you must pay off your loan on a set schedule, your monthly payments may be higher than they would on a personal line of credit.

    How to qualify for a personal loan

    If you’re considering applying for a personal loan, here’s the process you’ll need to go through:

    • Verify your eligibility: Before you apply for a loan, make sure your finances are in a position for you to qualify. Eligibility requirements for personal loans often include:
    • Credit score: Some lenders only offer loans to borrowers with good or excellent credit. While others offer loans to borrowers with low credit scores, interest rates won’t be as competitive.
    • Verifiable income: You’ll have to provide proof of employment (or another source of income), along with pay stubs or another verification method.
    • Debt-to-income ratio (DTI): Each lender has its own DTI requirements, but the lower the DTI, the better. Most lenders prefer a DTI of 35% or less.
    • Shop around: Compare personal loan lenders based on factors like your financial situation, the amount you need to borrow, and which lender offers the best rates and fees.
    • Get prequalified: Most lenders allow you to prequalify without it impacting your credit. While prequalification isn’t a guarantee of final approval, it can be a good indicator and can show you what interest rate you may qualify for.
    • Complete your application: Once you’ve chosen a lender, you can complete your application online. You’ll have to provide personal and financial information, as well as consent to a hard credit inquiry, which can temporarily lower your score.
    • Get your loan funds: Depending on the lender, once your loan is approved, you may get your money in as little as a day or as much as a week or so.

    Learn More: What Are the Requirements for a Personal Loan?

    Compare Personal Loan Rates by Lender

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    When to choose a personal loan

    A personal loan is an ideal choice when you need to borrow money for a specific one-time purchase and you have a good idea of how much you’ll need. 

    For example, many people use personal loans for debt consolidation. They add up their debt and borrow just enough to pay off their existing creditors.

    Many people also use personal loans for large purchases or one-time financial emergencies. 

    For example, suppose your car breaks down and you don’t have the cash to pay for it. The mechanic has given you a repair quote of $2,500, so you have a good idea of how much you’ll need to borrow.

    Read More:

    Meet the expert:
    Erin Gobler
    Erin Gobler