What’s the difference between a Line of Credit and Loan?

If you need money to cover some unexpected expenses, you can take out a line of credit or loan. But what are the differences between these two financing options? While a loan can provide you with a cash lump sum to borrow, with a line of credit, you get approved to borrow money up to a certain maximum credit limit.

Similar to a credit card, a line of credit allows you to draw cash when you need it. A loan differs in that you get all the money you borrow upfront in one amount and pay it off overtime.

What is a personal line of credit?

A personal line of credit provides a lump sum of money all at once. A personal line of credit gives access to funds that you can borrow from over and over again, like a credit card. But unlike a credit card, personal lines of credit often carry relatively low interest rates.

How a personal line of credit works

A personal line of credit works when you apply and get approved for a maximum credit line you can draw on at anytime. You only get charged interest on what you borrow. Once you repay the amount you can then reborrow that amount.

Types of personal lines of credit

Here are a few examples of personal lines of credit:

• Personal line of credit
• Home Equity Line of Credit 
• Unsecured line of credit
• Secured line of credit
• Business line of credit

What is a personal loan?

A personal loan is a sum of money that you can borrow from a lender and pay back with interest overtime. Personal loans can either be unsecured or secured by an asset you’ll provide as collateral, like your car or house. 

How a personal loan works

Personal loans come in many forms and can be secured or unsecured.  With a secured personal loan, you have to offer up collateral like a home or car. If you default, the lender gets that asset. Mortgages and auto loans are examples of secured debt.

Types of personal loans

Here are a few examples of loans:

• Payday loans
• Installment loans
• Title loans
• Student loans
• Home equity loans
• Differences between personal loans and lines of credit

While loans and lines of credit can both help you pay for things like car repairs or unexpected emergencies, they’re not created equal. A personal loan you get the cash and then pay it back overtime with principle and interest. A line of  credit you get a credit line you can draw on at anytime and only pay interst on what you borrow.