What’s the Difference Between Personal Loans and Personal Lines of Credit?

Updated on April 9, 2024

At a Glance

  • Personal lines of credit and personal loans both offer flexibility for various financial needs.
  • Creditworthiness assessments are based on credit score, income, and employment.
  • Both may have fixed or variable interest rates, and managing them responsibly can boost credit scores.
  • Personal loans provide a lump sum with fixed interest rates and regular monthly payments, while lines of credit have a revolving limit, variable interest rates, and flexible repayments.

In the realm of personal finance, the choice between a personal line of credit and a personal loan is often a critical decision that can significantly impact your financial journey. Both options share certain similarities, making them versatile tools for accessing funds, but they also possess distinct characteristics that cater to specific financial needs. 

The article will explore these similarities and differences, helping you better understand when to opt for a personal line of credit and when a personal loan may be the most suitable choice.

Similarities: Personal Line of Credit vs. Personal Loan

Personal lines of credit and personal loans have several similarities that make them versatile options for accessing funds. Here are some of the key similarities:

  • Purpose of Use and Flexibility: Both personal lines of credit and personal loans offer flexibility in using borrowed funds. You can choose how to allocate the money for various financial needs, such as financing an HVAC system or taking a vaction.
  • Access to Funds: Personal lines of credit provide a revolving credit limit, while personal loans offer a lump sum upfront.
  • Repayment Terms: Borrowers typically make fixed monthly installments covering the principal and interest, established at the outset.
  • Creditworthiness Assessment: Lenders assess creditworthiness based on credit score, income, and employment history to determine eligibility and set terms.
  • Credit Score Impact: Managing these financial products responsibly can positively impact your credit score, while missed payments can harm it.
  • Interest Rate Variability: Both options may offer fixed or variable interest rates, providing predictability or potential savings based on market conditions.
  • Application Process: Application Process: To assess eligibility and terms, applicants must submit an application, provide paperwork, and undertake a credit check.
  • Early Repayment Option: Borrowers can usually repay ahead of schedule without penalties, saving on interest charges.
  • Positive Credit Score Impact: Responsible financial management can enhance your creditworthiness when using these products.

Differences Between a Personal Loan and a Line of Credit

Now that we’ve explored the similarities let’s delve into the key distinctions between personal loans and personal lines of credit. Understanding these differences is important in determining which option aligns better with your financial needs.

How Funds Are Paid Out:

  • Personal Loan: Typically provides a lump sum of money upfront, making it ideal for specific purchases or structured plans. For example, if you’re renovating your kitchen, you’ll receive the funds in one go, allowing you to hire contractors, buy materials, and cover renovation expenses systematically.
  • Personal Line of Credit: Offers a revolving credit limit akin to a credit card. This flexibility is advantageous when your borrowing needs vary over time or if you want to have funds accessible for future expenses. 

Interest Rates:

  • Personal Loan: Typically features fixed interest rates, ensuring consistent payments throughout the loan term. This predictability aids budgeting and financial planning. For example, if you secure a personal loan at a fixed 5% interest rate, your monthly payments remain steady for the entire loan duration.
  • Personal Line of Credit: Often comes with variable interest rates that may fluctuate. While this entails the potential for higher interest payments, it also presents the opportunity to benefit from lower rates if market conditions change. If you hold a personal line of credit with a 4% variable interest rate and market rates drop to 3%, you can take advantage of the lower rate, potentially saving on interest costs.

Repayment:

  • Personal Loan: Typically adheres to a fixed term, such as three to five years. This results in regular monthly payments until the loan is fully repaid. This structured approach aids in setting a clear debt repayment timeline and effective budgeting.
  • Personal Line of Credit: Offers more repayment flexibility. You can opt for interest-only payments or pay a percentage of the outstanding balance. This adaptability allows you to adjust payments based on your financial situation. 

While personal lines of credit and personal loans share these similarities, it’s crucial to consider their differences to determine which option aligns better with your financial goals and circumstances. Factors like your borrowing needs, risk tolerance, and preferences will play an important role in choosing between the two.

Choosing Between a Personal Loan and a Line of Credit: Which Is Right for You?

Now that we’ve explored the distinctions between personal loans and personal lines of credit let’s address which option suits you better. It’s important to note that there’s no universal answer – the decision hinges on your circumstances and financial objectives.

When to Opt for a Personal Line of Credit:

Ongoing or Unpredictable Expenses

A personal line of credit can be ideal if you anticipate continuous or unforeseen financial needs. For instance, if you’re renovating your home and need periodic payments to contractors, a line of credit offers the flexibility to access funds as required.

Emergency Fund: 

A personal line of credit can also serve as a valuable safety net for unexpected emergencies. It offer quick access to funds when you face unexpected medical bills, car repairs, or other urgent financial situations.

Irregular Income:

Individuals with irregular or fluctuating income, such as freelancers or self-employed individuals, may find personal lines of credit advantageous. This financial tool bridges income gaps and covers essential expenses during low-earning periods.

When to Consider a Personal Loan:

Specific Borrowing Needs

Suppose you have a well-defined borrowing purpose, such as purchasing a car, financing a major purchase, or consolidating high-interest debt. In that case, a personal loan may be the more suitable option. Personal loans offer a structured repayment plan and a predetermined timeline for repaying the debt, making them ideal for targeted financial goals.

Structured Payments

Personal loans are characterized by fixed repayment terms, which provide clarity and predictability. A personal loan aligns with your preference if you prefer a clear plan for paying off your debt and the discipline of regular, consistent payments.

Debt Payoff Goals: 

A personal loan offers an effective solution for consolidating high-interest debts into a single, manageable loan. By consolidating debt, you can streamline your financial obligations and potentially reduce the overall interest expense.

Best Personal Loans for Your Financial Needs

In today’s financial landscape, personal loans have become a valuable resource for individuals seeking to meet various financial goals. Whether you’re looking to consolidate debt, cover unexpected expenses, or fund a major purchase, finding the right lender is crucial. These lenders offer competitive APRs, flexible borrowing terms, and varying credit score requirements to suit your unique financial circumstances.

AmOne (Best for Okay Credit and Good Credit)

AmOne is a loan-matching service that connects borrowers with a network of reputable lenders. It simplifies the loan search process by matching borrowers with lenders that suit their unique financial situations.

AmOne Personal Loan

4.5
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

600

Fixed APR

3.99%-35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 600.
  • Fixed APR: 3.99%-35.99%.
  • Loan amounts: $1,000 to $50,000.
  • Repayment: 1 to 7 years.

Qualifications

  • Must be at least 18 years old.
  • Must be a U.S. citizen or permanent resident.
  • While there’s no specific income requirement, a consistent source of income is essential for the applicant.

Pros

  • Suitable for individuals with lower credit scores.
  • No cost for the matching service.
  • Attractive loan rates.

Cons

  • Acts as an intermediary, not a direct lender.
  • Risk of multiple contacts from prospective lenders.
  • Lack of clarity on lender details.

Spotlight Loans (Best for Bad Credit)

Spotlight Loans specializes in providing personal loans to help borrowers navigate financial hurdles, offering rapid approvals and funding for everything from debt consolidation to emergency costs, with a focus on accommodating various credit histories.

Spotlight Loans

4.8
Stilt rating
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

6.63% and up

Variable APR

N/A

Overview

  • Minimum credit score: n/a
  • Variable APR: 4.99% and up
  • Loan amounts: $100 – $5,000
  • Repayment: Depends on choice of lender

Qualifications

  • Be 18 years of age or older
  • Have a checking or savings account
  • Have regular income
  • Have a fair credit rating

Pros

  • Spotlight Loans is willing to work with individuals who have less-than-perfect credit, making it a viable option for those who may struggle to secure loans from traditional lenders​​​​.
  • Spotlight Loans offers same-day approval and funding, which is beneficial for those in urgent need of funds. This makes it a good option for emergency financial situations​​.
  • Unlike traditional payday loans, Spotlight Loans provides the option to repay the loan over a period of months, offering more flexibility in repayment planning​​​​.

Cons

  • One of the most significant drawbacks of taking a personal loan with Spotlight Loans is the potentially high interest rates. With APRs that can be much higher than traditional personal loan lenders, this can lead to substantial interest payments over time​​.
  • Spotlight Loans offers loan amounts that are relatively low, which may not be sufficient for all borrowers’ needs​​​​.
  • Spotlight Loans services are not available in all states, so it’s important to check if you reside in an eligible location before applying​​.

Spring Loans (Best for Bad Credit)

Spring Loans offers tailored lending solutions for varied financial needs, combining flexibility with a streamlined application process.

Spring Loans Personal Loan

4.2
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

27.00%

Variable APR

N/A

Overview

  • Minimum credit score: None.
  • Fixed APR: 27.00%
  • Loan amounts: $3,000.
  • Repayment: 48 months.

Qualifications

  • Demonstrate a recurrent income.
  • Minimum age prerequisite: 18 years.
  • Validate U.S. citizenship status with an SSN.
  • Provide a legitimate U.S. driver’s license or a state identity card.
  • Establish a functional bank account for incoming deposits.
  • Adhere to any specific demands by the loan provider.

Pros

  • Open to applicants with any credit background.
  • Four-year loan period aids in structured financial management.
  • The $3,000 offer addresses several short-term financial challenges.
  • Wide-reaching eligibility criteria invite a broad spectrum of applicants.
  • The focus on dependable income over job title benefits varied income sources.

Cons

  • The set 27% APR is higher than many alternatives.
  • Restriction to a $3,000 loan might not cover all financial outlays.
  • Possessing specific IDs is mandatory, sidelining some applicants.
  • A prerequisite for an ongoing bank account may limit certain users.

First Premier Lending (Best for Bad Credit and No Credit)

Specializing in customized loan services, First Premier Lending focuses on understanding and addressing individual borrower requirements.

First Premier Lending Personal Loan

4.2
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

None

Fixed APR

27.00%

Variable APR

N/A

Overview

  • Minimum credit score: None.
  • Fixed APR: 27.00%.
  • Loan amounts: $3,000.
  • Repayment: 48 months.

Qualifications

  • Maintain a consistent source of income.
  • Must be at least 18 years of age.
  • Possess valid U.S. citizenship and a legitimate social security number.
  • Hold a current U.S. driver’s license or state-issued ID.
  • Keep an active bank account for direct deposit.
  • Satisfy any lender-specific criteria, such as credit rating, borrowing history, or place of residence.

Pros

  • No minimum credit score requirement allows accessibility for those with varied credit histories.
  • 48-month term provides clarity and allows for long-term financial planning.
  • Specific loan amount of $3,000 can meet many short-term financial needs.
  • Broad set of qualifications make the loan accessible to a wide range of people.
  • Emphasis on consistent income, not necessarily employment type, allows flexibility for borrowers.

Cons

  • A fixed APR of 27% is relatively high.
  • Loan amount is capped at $3,000, which might not cater to larger financial requirements.
  • Requirement of a U.S. driver’s license or state-issued ID could exclude some individuals.
  • Mandatory active bank account could be limiting for those who are unbanked.

Upgrade (Best for Good Credit)

Upgrade is a reputable lender known for its competitive rates and flexibility. It serves a vast range of borrowers, making it an ideal choice for consumers with various credit profiles.

Upgrade Personal Loan

5.0
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

560

Fixed APR

8.49% - 35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 560
  • Fixed APR: 8.49% – 35.99%
  • Loan amounts: $1,000 to $50,000
  • Repayment: 3 to 5 years (7 years on some larger loans)

Qualifications

  • Possess an active bank account.
  • Able to provide a legitimate email address.
  • Minimum age requirement: 18 years (19 for Alabama residents).
  • Credit score of 600 or higher.
  • Annual income of $25,000 or more.

Pros

  • Willing to accommodate borrowers with a credit score as low as 560.
  • Offers flexibility with a range of loan amounts from $1,000 to $50,000. This can be suitable for both small and large financial needs.
  • Provides options for repayment, allowing borrowers to choose a timeline that best suits their financial situation.
  • Once approved, borrowers can access funds in just one day, which is useful for urgent financial needs.

Cons

  • Origination fees can go as high as 9.99%, which might add a significant cost to the loan.
  • Apart from the origination fee, there are fees for late payments and failed payments, which can add up if one is not careful.
  • While there is an option to extend repayment for larger loans up to 7 years, it’s not standard for all loan amounts.

LendingPoint (Best for Okay Credit)

LendingPoint specializes in providing loans to individuals with less-than-perfect credit scores. If you’re working to improve your credit or facing challenges, LendingPoint may offer a suitable solution.

LendingPoint Personal Loan

4.5
Stilt’s lender ratings reflect the findings and opinions of our editorial staff. Our scoring methodologies consider a wide array of factors and data points for every lender, offering, and financial solution.
Min. credit score

660

Fixed APR

7.99-35.99%

Variable APR

N/A

Overview

  • Minimum credit score: 660.
  • Fixed APR: 7.99-35.99%.
  • Loan amounts: $2,000-$36,500.
  • Repayment: 2 to 5 years.

Qualifications

  • Credit score requirement: 660, utilizing FICO v9 and VantageScore v3.
  • Credit history must be at least six months old.
  • Debt-to-income ratio cap: 50%, excluding mortgage.
  • Acceptable income sources include employment, alimony, retirement, child support, and Social Security, but not partner’s earnings. Minimum income: $35,000.

Pros

  • Preliminary credit inquiry for pre-qualification.
  • Quick disbursement of funds.
  • Mobile application available for managing loan repayments.
  • Flexibility to modify payment due date.
  • Complimentary access to credit score.

Cons

  • Potential origination fee applicable.
  • Reports payment history to two major credit bureaus.
  • Does not offer joint, co-signed, or secured loans.
  • Does not provide high-value loans.

Final Thoughts

In personal finance, deciding between a personal line of credit and a personal loan ultimately depends on your unique financial circumstances and objectives. Personal lines of credit offer flexibility and adaptability, making them ideal for ongoing or unpredictable expenses, emergency funds, or individuals with irregular income. On the other hand, personal loans provide structured solutions with fixed terms, making them suitable for specific borrowing needs, structured payments, and debt consolidation.

Whether you choose a personal line of credit or a personal loan, responsible financial management and timely repayments are key to enhancing your economic well-being and maintaining a positive credit profile.

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Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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