When individuals require financial assistance to cover personal expenses or manage unforeseen emergencies, personal loans and lines of credit are two popular options to consider. While both provide access to funds, they operate differently and cater to distinct borrowing needs. In this article, we will explore the significant differences between a personal loan and a line of credit to help you make a wise decision based on your specific requirements.
What are personal loans?
A personal loan is an unsecured credit option, that does not need any kind of security or collateral.
Lenders consider a number of factors when determining a borrower's eligibility for a personal loan, including income, credit score, and repayment history. All you have to do is fill out an online form and upload the required documentation. The loan amount will be transferred to your account once the lender has reviewed and approved your documentation. With lenders like Bajaj Finance Limited, the personal loan disbursal process is simple, hassle-free, and requires little documentation.
What is line of credit?
A line of credit is a flexible form of borrowing that provides individuals access to funds up to a predetermined credit limit. Unlike a traditional loan, a line of credit allows borrowers to withdraw and repay money multiple times as needed, making it a revolving credit facility. Interest is only charged on the amount borrowed, not the entire credit limit. It offers borrowers the freedom to manage fluctuating or ongoing expenses, providing financial flexibility and convenience. Line of credit is commonly used for short-term financing needs, emergencies, or to cover irregular income gaps.
Personal loan vs. Line of credit
Let us discuss some key factors that make personal loans and lines of credit distinct from one another:
1. Nature of borrowing
Personal loan: A personal loan is a lump-sum amount borrowed from a financial institution or lender. Upon approval, borrowers receive the entire loan amount which can be repaid in fixed instalments over a predetermined period. Interest is charged on the entire amount that is disbursed.
Line of credit: A line of credit is a revolving credit facility that allows borrowers to access a predetermined credit limit. Unlike a personal loan, borrowers can use funds from the line of credit whenever they need, up to the specified limit.
2. Repayment structure
Personal loan: Repayment of a personal loan is structured into fixed instalments over a specific period, usually ranging from one to eight years. Borrowers must repay both the principal and the interest within the agreed-upon term.
Line of credit: Repayment of a line of credit depends on the outstanding balance. The borrower can make minimum monthly payments (typically based on the interest accrued) or choose to pay off the entire balance at any time.
3. Interest rates
Personal loan: Personal loans generally have a fixed interest rate, which is applied to the entire loan amount throughout the repayment period. The interest rate is determined at the time of loan approval and remains constant unless specified otherwise in the loan agreement.
Line of credit: Line of credit usually has variable interest rates, which means the interest rate can fluctuate based on market conditions. Interest is only charged on the amount borrowed, not on the entire credit limit.
Additional read: Different Types of Interest Rates
4. Purpose of borrowing
Personal loan: Personal loans are ideal for large expenses, such as medical emergencies, home improvements, higher education, or major purchases. Borrowers have a clear understanding of the loan amount and the repayment schedule from the beginning.
Line of credit: Line of credit is more flexible and suitable for unpredictable small needs. Borrowers can use funds as needed for various short-term expenses.
In conclusion, both personal loans and lines of credit offer valuable financial solutions, but they cater to different borrowing needs. When deciding between the two, consider your specific financial requirements, repayment capacity, and preferred borrowing style. Whether you opt for a personal loan, or a line of credit, responsible borrowing and diligent financial planning will help you effectively manage your finances and achieve your goals.
Bajaj Finance offers personal loans of up to Rs. 55 lakh. While Bajaj Finance doesn’t offer line of credit, customers can choose to opt for our Flexi Loans, which function in a similar way. With our Flexi Loans you get a pre-assigned limit from which you can borrow and pre-pay as you need.
Irrespective of whether you borrow a loan, or line of credit, always compare offers from different lenders, review the terms and conditions, use an EMI calculator and seek professional advice if needed, to make a prudent borrowing decision.
