Personal Loan Vs Line of Credit: Key differences to know

Understanding the benefits, features and function of a personal loan vs a line of credit is crucial. Although these borrowing options sound quite similar to each other, they have some major differences. By knowing what they offer and how they differ, you can choose the best option to meet your needs.

Read on to learn what these options mean and how they differ.

Understanding Personal Loans

This is a type of credit where you receive the amount approved by the financial institution in a lump sum. These loans come with no restriction on end use, meaning you can cover a number of expenses, such as:

• Down payments 
• Payment of your children’s school fees
• Medical bills
• Renovation of your home
• Your child’s wedding

Lenders approve your application for these loans based on your:

• Income and employment
• Age and residence
• Credit history and score
• Credit utilisation ratio
• Debt-to-income ratio

Here are some benefits of a personal loan:

• No restriction on end-use
• No collateral requirements
• Funds are disbursed in a lump sum
• Interest rates and EMIs remain fixed throughout the tenure

With its myriad of benefits, personal loan also have some limitations, such as:

• Interest rates and other charges can be higher than other forms of credit 
• Interest owed is calculated on the total loan amount, even if you don’t use all of it

Understanding a Line of Credit

This option works similarly to credit cards, where you receive a fixed limit that you can withdraw funds from and use for specific purposes only. The lender will charge interest on the amount you use and the repayment can be in fixed instalments, interest-only, or any other option as agreed. 

Some line of credit options you can apply for include: 

• Personal line of credit
• Business line of credit
• Home equity line of credit (HELOC)

Here are some pros of a line of credit:

• You can withdraw the funds whenever needed
• Interest is applicable only on the amount that you use
• You can make repayments in various ways

Some limitations of a line of credit include:

• You need a high credit score to apply
• The interest rates are not fixed, which makes planning the repayment difficult
• This credit option can lead to overspending

Difference Between a Line of Credit and a Loan

Refer to this table to know how both these credit options differ:

Personal Loan Vs Line of Credit
	Personal Loan	Line of Credit
Disbursal of funds	The full sanction is disbursed to an account of your choosing	You can withdraw funds up to the approved limit as and when required
Purpose	Funding comes with no restriction on end use, which means you can use the amount for your various needs	You can only use the funds only for the specific purpose that you apply for, like a student line of credit or a business line of credit
Charges	Fees and charges include:Interest rateApplication feesLate payment chargesPrepayment charges	Fees and charges include:Interest rateAnnual feesLate payment chargesOverdraft fees
Interest calculation	Interest accrues on the total loan amount from the day you receive it	Interest accrues only on the amount that you utilise, not the entire limit
Repayment tenure	Generally, goes up to 60 months but can be higher depending on the lender	Depends on your usage and other factors, including the financial institution you choose
Type of interest rate	A loan can have fixed as well as variable interest rates	A line of credit can have only variable interest rates

Armed with this information, choosing the right option is a lot easier. If you decide that a personal loan is more suitable, consider getting an Instant cash Loan from Fibe. You can get up to ₹5 lakhs at competitive rates and flexible tenure. 

The process is also simple as you need only submit basic documents online and can get access to funds in a matter of minutes. Download our Instant Loan App or apply directly through our website. 

FAQs on Personal Loan vs Line of Credit

Is a credit line the same as a personal loan?

No, here’s how these credit options differ:

• Through a personal loan, you receive the amount in a lump sum and you can address numerous expenses 
• In a line of credit, you get a limit from which you can withdraw whenever needed only for the purpose you apply for, like a student or business line of credit 

What is the difference between a loan and a line of credit?

Here’s how a personal loan and a credit line differ:

• You receive a loan in a lump sum, whereas a credit line comes with ongoing access
• You can use a personal loan for various expenses, while you can only use a credit line for specific purposes
• Personal loans can have fixed or variable rates, while credit lines come with variable rates
• The interest is calculated on the full amount for a loan, while interest for a line of credit is based only on the amount that you withdraw.