There is a rare chance you have asked yourself this question! What is it that separates a loan product from the line of credit? Both loans and lines of credit allow businesses and consumers to borrow money to make purchases or urgent expenses. These may include personal loans, home loans, mortgages, credit cards, home equity lines of credit, business loan and Vehicle loans.
The significant difference between a line of credit and a loan is how you receive the money and how or with what do you repay the lent amount. A line of credit is a revolving account that allows borrowers to withdraw and repay from available funds whereas a loan is a lump sum amount which is repaid over a fixed term.
A line of credit is somewhat like a credit card because just like a credit card this is a flexible solution for borrowers. You can simply withdraw money by writing a cheque. Once you have repaid the borrowed part of your credit line you can redraw again, and you do not have to make any payments until you use your line.
In case of a loan you receive the total loan amount once you are approved and once you receive the whole amount, you start paying interest immediately on the full amount. There is a fixed tenure of payments which will reduce eventually as the loan is paid off.
First and foremost, let’s try and understand what loan is:
Loan basically refers to an installment loan which means the lender will lend you a lump sum amount based on your request. You must repay this lump sum amount in regular monthly installments with interest till the tenure lasts. A common type of loans that people opt for include personal loans, home loans, business loan, home loans, auto loans, student loans, and mortgages. The loan type generally depends on the need of the borrower. People usually opt for loans when they want to purchase something that is beyond their affordability like a house or an automobile or probably an expensive vacation. A loan allows the borrower to extend his/her spending power for an expense that can later be paid off with added interest over a period of time.
LINE OF CREDIT
Line of credit is basically a revolving credit account from which a borrower can withdraw or spend money up to a certain limit. The borrower can repay the borrowed amount on or before the due date and then spend it again. One of the common examples of a line of credit is a credit card, home equity lines of credit and business equity lines of credit.
THE BIG DIFFERENCE :
Now let’s discuss what separates these two lending products.
- Loans are a better option for large, one-time investment or purchase. These expenses can include a new house, car, marriage, college education, business, etc.
- Unlike lines of credit, loans carry a fixed rate of interest throughout the whole tenure which means if you have opted for a loan amount with a 5% interest rate, that rate will remain the same during the life of the loan.
- In case of loan, you’ll begin accruing interest on the whole loan amount
Lines Of Credit
- Lines of credit are a better option when one is looking for small amounts or expenses which are unanticipated. Forex- you might need a gadget that you urgently have use for but do not have enough funds to buy, in this case, you use your credit card.
- Unlike Loans, different lines of credit may carry variable interest rates.
- Having a credit line ensures that you have access to funds that you can use and payback within a stipulated time frame. It shifts the load of arranging funds in lumpsum.
- Incase on lines of credit you’ll be only charged interest on the outstanding balance until you withdraw on the line.
Both lines of credit and loans are equally good sources of finance. The deciding factor is the need for the borrower. As a borrower, it depends on you if you are looking for something small or big, whether you are looking for a long-term or short-term loan, sometimes it also depends on your affordability. We hope that we were able to break down the differences between the two. If you have any such questions dancing inside your head, ask us! Who knows your query might be the topic of our next blog!
Can Also Read:- 5 Tips to Nail Personal Loan Approval
Until then…happy buying!