LOS ANGELES, December 28, 2021 (GLOBE NEWSWIRE) – The two main types of credit are loans and lines of credit. The two are similar in that they allow people to borrow money for a variety of purposes, such as covering cash flow shortages, refinancing debt, or even going on vacation.
But each of these loans works differently in a few areas, and knowing the differences between the two can help borrowers determine which option is right for them. Let’s take a closer look at how lines of credit and loans work and how they differ.
What is a loan?
A loan is money that a borrower can receive from a lender and repay all at once or over time, depending on the type of loan and the terms of repayment. Borrowers can get loans from banks, other physical lenders, and online lending sites.
There are many types of loans, including:
- Auto loans
- Personal loans
- Cash advances
What is a line of credit?
A line of credit is a form of revolving credit. This means that people can borrow as much as they need – up to a predetermined credit limit – and pay it back when they can. The lender will only charge interest on the amount subscribed by the borrower.
Some types of lines of credit include:
- Personal lines of credit
- Business lines of credit
- Guaranteed lines of credit
- Home Equity Lines of Credit (HELOC)
Differences between loans and lines of credit
Here are some notable differences between loans and lines of credit:
Borrowers can take out a loan all at once and usually pay it back in fixed monthly amounts over time. For example, a borrower can pay off a car loan monthly over 5 years.
On the other hand, borrowers can use their lines of credit at any time. In addition, they can repay as they wish, as long as they make at least the minimum payment on time.
Borrowers often get loans for a specific purpose, such as buying a car or renovating a room in their house.
With lines of credit, on the other hand, borrowers can use them for multiple purposes since they can borrow continuously. In addition, lines of credit are sometimes used for everyday expenses, such as groceries.
Loans earn interest all at once or daily, but the rates tend to be lower. This interest is taken into account in the amount of the monthly payment. In addition to this, the loans may have other fees, such as origination fees and prepayment penalties.
Lines of credit earn interest on the amount borrowed, but the rates tend to be higher than on loans. However, lines of credit generally have lower fees.
Loans vs Lines of Credit: Different Features, Different Goals
Loans and lines of credit have a few differences, but neither option is better than the other. Instead, their differences in characteristics make them serve distinct purposes.
Overall, loans can be great tools for large, single-purpose expenses, such as renovations or buying a home. Meanwhile, lines of credit can provide an extra layer of financial security and provide access to funds when the borrower cannot predict exactly how much money they will need. Using both in their respective roles can help borrowers grow financially.
Notice: The information provided in this article is for informational purposes only. Consult your financial advisor about your financial situation.
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