Personal loan vs line of credit: Which borrowing option is right for you? | Mint

You may find yourself without cash planning for travel, home renovations, medical bills, or schooling, and may contemplate a personal loan or line of credit. While personal loans and lines of credit are both financial instruments that allow you to access funds with some degree of liquidity, they do operate in very different ways.

In order to help you make up your mind about which loan option fits your financial goals the best we will look at the differences between the two.

What is a personal loan?

A personal loan is a sum of money that banks or financial institutions lend to you upfront. The loan is repaid over a certain period of time, typically between one and five years, in equal monthly payments (EMI).

Key features

• Fixed loan amount received all at once.
• Fixed repayment plan includes interest, making it a great option for unique, large expenses (e.g. wedding, debt consolidation).

What is the line of credit?

A more flexible option is a line of credit (LOC). LOCs are similar to credit cards, as you are approved for a limit, but you can use only the amount you need, when you need it. Interest is charged on only the amount used, not the entire credit limit.

In conclusion, while line of credit and personal loans both provide you options to meet your financial goals, a line of credit provides you more flexibility and control while a personal loan will provide you with more structure and certainty. Before making a decision consider your current financial situation, the type of spending you will be doing, and your personal comfort level with repayment.

Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.