Line of Credit Vs. Personal Loan: Which is right for me?
When it comes to knowing which products are right for you it can get confusing. There are subtle differences that can mean a world of difference. How do we know if a loan is right for us or a line a credit?
Line of Credit
A line of credit allows you to borrow money up to a certain limit. It’s similar in that way to a credit card. You can use the funds however you wish and you only have to pay interest on the amount that you’ve used. Lines of credit can be set up so you only have to pay the interest payment each month or can be set up where the payment required pays your interest and part of the principal. You can always pay back the principal balance at any time. Be careful if you choose the interest-only option because then it ‘s up to you to pay back your principal and sometimes this becomes the “never-ever” plan, you never-ever pay it off!
Personal lines of credit may be secured or unsecured, but borrowers are usually advised to apply for secured lines of credit when possible. A secured credit line typically offers a higher credit limit and has a lower interest rate.
A Home Equity Line of Credit (HELOC) is a popular option in the modern market. It may be called different things depending on your institution but it enables you to borrow funds against the value of their property. HELOCs are a power tool if money is needed for urgent house improvements, upgrades or where accessing your equity will be used for other revenue generating assets. This option does usually mean you’re going to have to pay fees to get it set up so a bit more advanced planning is a good idea just to make sure you know what you’re getting yourself into.
Personal loans are another option for you when you need money. There are many personal loan types that are offered on the market. In most cases, a credit check is required before approval and the interest rates are competitive. Terms can vary beetween 6 months to 60 months and sometimes longer depending on the loan.
Personal loans are better suited for individuals who require a lump sum of money to make a payment for a one-off purchase, like buying a car. Personal loans are offered with a fixed or variable interest rate and you can usually choose between weekly, bi-weekly, semi-monthly and monthly payments. The payments are generally a combination of principal and interest. You want to make sure there are no hidden fees if you want to make extra payments or pay the whole thing off in full.
Like lines of credit, personal loans can be either secured or unsecured. Secured loans can be backed by property or investments which give you access to higher borrowing amounts and lower interest rates. Unsecured personal loans tend to have a faster approval process and lower fees, but usually will come with higher interest rates.
With so many options out there, it can be difficult to know which type of loan best suits your specific situation. Consider the scenarios above and think carefully about your ability to pay the money back over a realistic timeframe. The last thing you want to do is get a loan or line of credit without knowing exactly how it’s going to get paid back.
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This article was contributed by our friends at Loans Canada, Canada’s loan search platform. As a borrower, the health of your credit is important. In fact, a good credit score can make it easier to get approved for credit products, loans, and other financial services....
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