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Personal Loan or Line of Credit: Which is Best?

Posted April 13th, 2010
by Staff

Whether you’re trying to get together some money to send one of your kids to college, or whether you’re looking into putting an addition onto your home, there are times when you need a sizable infusion of cash. Two of the options available to you often include a personal loan or a line of credit. Each of these two types of credit has its own distinct advantages as well as certain disadvantages.

Personal Loans

Personal loans come in two flavors. The first is an unsecured personal loan. An unsecured personal loan is one in which you offer up no collateral. The lender, therefore, accepts higher risk. This means that you’re going to pay more in interest on this kind of loan than you would a secured personal loan.

A secured personal loan is one in which you put some property, whether it’s a vehicle or real estate, up as collateral. If you don’t pay the loan off, the lender has the right to take that property.

A personal loan will give you a lump sum of cash at a fixed rate of interest. You then make payments on that loan for a fixed term.

Lines of Credit

A line of credit is somewhere between a personal loan and a credit card. With a line of credit, you’re approved for up to a certain amount to borrow. However, you don’t borrow the entire amount all at once. Instead, you use the credit on an as-needed basis.

So far, it sounds like a credit card, right? Well, a line of credit is different in that it can be secured. This means that, unlike with a credit card, the lender can seize the collateral if you don’t meet the terms of the line of credit.

Which is Better?

A line of credit allows you to borrow the money a little at a time, which means that interest accrues more slowly. On the other hand, a personal loan may have a better rate of interest than a line of credit.

If you know exactly how much you’re going to need and you need it all at once, a personal loan is probably better than a line of credit. On the other hand, if you don’t need all of the money at once you may be able to save some money by using a line of credit instead.

Photo via pescatello

Categories: Advice



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