Line of Credit vs Loan: Which Is Right for You?

A personal line of credit is a "renewable" amount of money you can borrow from the bank. When you pay off the money you've borrowed, you can borrow it again.

Whereas, a personal loan is a one-time lump sum deposited into your bank account that you'll pay monthly. It's not "renewable."

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What Is a Personal Line of Credit?

A personal line of credit is an amount of money you can borrow on a continuous basis. It's similar to a credit card, but instead of getting a plastic card with benefits, you'll get access to an account. When you want to use money from the account, you'll transfer it to your checking or savings.

A personal line of credit is commonly used for daily purchases, like dining out and grocery shopping. It's also perfect for monthly expenses like utilities, insurance payments and streaming services — manageable expenses that are easy to pay off immediately. That's because you'll only pay interest on the amount you carry month-to-month.

What Is a Personal Loan?

A personal loan is a different way to borrow money. The bank will make a single cash deposit into your account — not credit. You'll be put on fixed monthly payments until the loan is paid off.

What's the Difference? Line of Credit vs. Personal Loan

The big difference between a line of credit and personal loan is that your borrowing power won't replenish as you pay off your personal loan. You receive the money, and your account will automatically close when the loan is paid off.

Personal loans are good for larger expenses that you can't pay off quickly. That's because interest rates tend to be much lower than lines of credit — especially for those with good credit. From wedding expenses to a mortgage to debt consolidation.

How Do You Get a Personal Line of Credit?

A personal line of credit typically requires you to submit an application with a financial institution, such as a bank or credit union. In most cases, you can apply online or in-branch. Depending on the type of credit line you're opening, you may not learn your interest rate or credit limit until you're approved.

After approval, you can use your personal credit line for most purchases. Again, you'll be charged interest on any balance you carry month-to-month. In other words, you won't incur interest if you pay off your balance each month.

That doesn't mean borrowing the money is free, however; there may be other associated costs, such as annual fees — common with credit cards — and closing costs, which are common with a home equity line of credit.

How Do You Get a Personal Loan?

Unlike a personal line of credit, you'll shop for a personal loan based entirely on the amount you can borrow and the interest rate you'll pay. These are not hidden from you until after approval. You'll also choose a repayment term that works for your budget.

Once you get a personal loan, the bank will set you up with fixed monthly payments until your loan is paid off. In contrast to a personal line of credit, you're guaranteed to pay interest with a personal loan since it's part of your monthly payment.

Here's an example: Say you borrow $20,000 for a home repair at 10% APR. A two-year term would mean a $923 monthly payment — but a five-year term would mean a more manageable $425 monthly payment.

Pros and Cons of Each Option

Personal Line of Credit Pros

• Revolving amount of borrowing power

• Interest is only charged for money that you carry month-to-month

• Healthy activity is great for building positive credit history

Personal Line of Credit Cons

• High interest rates

• Dangerous for those who tend to overspend

• Often fees for certain activities, like cash advances and balance transfers

Personal Loan Pros

• Fixed monthly payments give you a clear payoff date

• Generally much lower interest rates than a personal line of credit

• May be more accessible for those with fair credit

Personal Loan Cons

• No repayment flexibility, though you can often pay off early without penalty

• There may be fees associated with opening the account

• Repayment terms tend to be shorter than personal lines of credit

How To Choose the Right Option for You

How To Apply for a Personal Line of Credit or a Personal Loan

The process for applying for either a personal loan or personal line of credit is similar. You can do it online, or you can walk into a branch — if the bank or credit union with which you're applying has brick-and-mortar locations.

1. Check Your Credit Score

If you've got "good" credit, which is considered 670 or higher, according to FICO, you shouldn't have much trouble being approved for either a line of credit or a loan. If your score is below this number, your options will likely be more limited.

2. Gather Your Documents

Once you find the loan or credit line you want, you'll need the necessary documents to verify your information.

• For a credit card: You'll generally only need to enter info like your Social Security number and household income

• For a personal loan: You may need to provide paystubs and ID.

• For a home equity line of credit (HELOC): You may also need a home appraisal, proof of insurance, etc.

3. What To Do Once You're Approved

You'll often be approved immediately for a personal loan or personal line of credit, but your status may change to pending — or declined — if there are mistakes on your application.

To give yourself the best chance at an approval, double-check your application — and don't lie about things like income. It's also wise to wait until your credit score is at 700.

FAQs

Which one is easier to get between a personal line of credit vs. personal loan?

A personal loan might be easier to get in terms of your credit score. Because a personal loan isn't reusable like a line of credit, banks may view it as less risky. That said, if your credit score is too low, you probably won't get the loan size and terms that you want.

Which has lower interest rates?

Personal loans often have lower interest rates than personal lines of credit.

Can I use either for daily expenses?

You can use either a personal line of credit or a personal loan for daily expenses. That said, it's unwise to use a personal loan for small purchases, because you'll incur interest every month until you pay off the loan. Better to pay with a personal line of credit and pay your balance each month — completely avoiding interest.

How do they affect your credit score?

When you open either a personal line of credit or a personal loan, your credit score will initially drop due to the lender performing a hard inquiry on your credit. Don't panic; your score will increase in a month or two if you exhibit responsible credit habits with them. It's also worth noting that a personal line of credit — namely, a credit card — can help your credit score by lowering your credit utilization — that is, the ratio of available credit to amounts owed. This is a huge factor in making up your credit score.

Can I switch from one to the other later?

You can't switch from a personal line of credit to a personal loan without opening another separate account.

Sources

• Consumer Financial Protection Bureau (CFPB). 2023. "If I pay off my credit card balance when it is due, is the company allowed to charge me interest for that month?"

• Consumer Financial Protection Bureau (CFPB). 2024. "What is a personal installment loan?"

• CFPB. "What You Should Know About Home Equity Lines of Credit (HELOC)."