We have always been taught to budget and save. But the realities of life don’t work as we have always been taught. There are times when one unexpected expense can make your budget come crashing down, leaving nothing to save. And you are left with just one option – to borrow.
Then again, we have always been taught that borrowing is bad as debt is the root of all evil. But, that’s not 100% true. Financially responsible people do exist, and they use credit to make purchases that they could have never dreamt of paying for in cash. And yet they enjoy a debt-free life.
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That said, borrowing is not bad if you are disciplined to pay it back.
So, when you need to borrow to meet an unexpected expense, you have two options – a personal loan or a personal line of credit. Both these options give you access to funds, but they work differently.
Here’s what you need to know about a personal loan or line of credit, and which is better for you.
What is a Personal Loan?
Personal loans are one-time unsecured loans that are offered with a specified interest rate, and a loan term, typically ranging from one to seven years. That means you need to pay predictable instalments every month for the life of the loan.
What is a Personal Line of Credit?
A personal line of credit is an unsecured revolving line of credit much similar to an unsecured credit card sans its high-interest rate. Once your credit line is approved, you get to borrow up to a maximum credit amount. You can withdraw as much money you need — up to your maximum credit line — at any given time.
The best part is that if you are not borrowing money from your line of credit, you are not liable to make any payments. Once you begin to withdraw funds, your repayment amount depends on how much is withdrawn in that specific period. The interest is applied only on the amount you withdraw and not on the entire credit limit.
Once approved, the line of credit stays with you forever. As you make your payments towards the principal, your credit line gets replenished.
Differences Between a Personal Loan and Line of Credit at a Glance
Here are the main differences between the two loan types:
| Personal Loan | Personal Line of Credit |
| Offered to you as an unsecured lump sum | Offered to you as an unsecured revolving line of credit |
| Best for one-time use | Best for using as and when needed |
| You pay interest on the full amount | You pay interest only on the amount taken from the credit line |
| Once repaid in full, the personal loan account is closed. You need to reapply if you need a personal loan again. | The personal line of credit stays with you forever as long as you keep replenishing it with your payments. |
Choosing Between a Personal Loan and a Personal Line of Credit: How to decide
In many cases, you can use both types of credit interchangeably. But in some situations, there is usually a clear winner. Here’s how you can figure out which loan is best for your situation.
When is a personal loan the right choice?
A personal loan is a perfect choice when you know –
- how much you’ll need, and
- you won’t require additional funds in the future.
For example, if you are seeking a loan to consolidate your debts. You already know how much debt you have before you borrow.
A personal loan can be the right choice in situations like these:
- Car repairs
- A wedding on a strict budget
- Medical bills
- Home improvement projects on a strict budget
- An emergency
All of the above situations typically need one time-bound lump sum payment. They don’t need the flexibility of multiple withdrawals from a personal line of credit.
When is a personal line of credit the right choice?
A personal line of credit is the best fit when you need access to funds on a recurring, as-needed basis.
Like in a home improvement project.
Your home improvement project may not have a defined cost. Here, the flexibility of a personal line of credit works best for you. The credit line will allow you to borrow in stages or as and when you need it.
A personal line of credit is also good for people with variable incomes – high in some months and low in some – like people who work on commission or are self-employed. The flexible credit line allows you to borrow money to meet your expenses in low-income months. And then during high-income months, you can repay the borrowed amount.
How to Make the Choice
Once you have figured out your situation, you can easily determine which loan product fits your needs.
Does your situation need you to make a lumpsum payment? Then choose a personal loan.
Does your situation need you to borrow again and again? Then choose a personal line of credit.
If you want to enjoy the benefits of both a personal loan and a credit line, then choose MoneyTap.
MoneyTap offers you a personal loan of up to Rs5 Lakh in the form of a personal credit line. You can withdraw as much as you want, as many times as you want, up to your credit limit and pay interest only on the amount borrowed.
Bottom Line
Once you have decided what loan to take, don’t forget to do your homework. Check your credit score. Choose your lender wisely. Don’t forget to do personal loan interest rates comparison. And most importantly, don’t rush into making a decision; take your time to be confident about your choice.