Personal loan vs. personal line of credit: which one is better?
By Rebecca Lake
Reviewed by Kimberly Rotter
Apr 29, 2023
Read time: 6 min
A personal loan gives you access to a lump sum of cash that you can use for a variety of expenses.
A personal line of credit is similar to a credit card.
When comparing personal loans vs. lines of credit, it's helpful to look at the rates and fees.
Some financial solutions are meant to help you cover a big expense, while some can help you cover your bases. That’s about as complicated as it gets when we compare a personal loan to a personal line of credit. One is money now. The other is more of a security blanket in case you need money another time.
Personal line of credit vs. personal loan
A personal line of credit is like a credit card. When you’re approved, you get a credit limit that you can borrow against…or not. You can borrow, repay, and borrow more as often as you like, up to your limit.
A personal loan, on the other hand, is a lump sum of money that you get all at once when your loan is approved.
Here’s how they work.
Personal line of credit
With a personal line of credit, you get approved for a set credit limit. Once your credit line is open, you can make purchases against it using a linked debit card or paper checks.
Meanwhile, the lender expects you to pay back what you borrow with interest. As you pay down your credit line, you free up available credit that you can tap into again.
Hmm…that sounds like a credit card.
Yep, a personal line of credit works like a credit card. Only, you typically can't earn rewards on purchases. Also, there might be a window of time during which you can use your line of credit. For example, your lender might give you a two-year draw period. That's when you can borrow against your credit line. Once the draw period ends, you'll have to repay any remaining balance due with interest and you won't be able to use your credit limit anymore. At this point, you’ll start paying off the loan in equal monthly payments calculated to pay off your balance by the end of the repayment term.
For a secured personal line of credit, you pledge something of value as a guarantee that you’ll repay the loan. Usually, that something would be money in the bank, such as a Certificate of Deposit account. This kind of personal line of credit usually has a lower interest rate compared to other borrowing options.
For an unsecured personal line of credit, the interest rate is usually variable and in the same neighborhood as loans you might qualify for.
A personal loan is an installment loan. You’ll get all the money in one lump sum and pay it back in equal installments over a predetermined repayment term, usually 2 to 5 years. You can use money from a personal loan to pay for just about anything.
For example, some of the most popular uses for a personal loan include:
Personal loans also need to be repaid with interest. Your lender will set the payment schedule, based on how much you borrow.
How are personal loans and personal lines of credit similar?
Personal lines of credit and personal loans have a few things in common. Here are some of the similarities:
Repayment. Both must be repaid with interest, and you might also have to pay fees for a personal loan or line of credit.
Availability. It's possible to find either borrowing option at traditional banks, credit unions, and online lenders.
Qualification. Credit scores and income are usually two of the most important requirements to get a personal loan or line of credit. Lenders usually require a hard credit pull to approve you.
Collateral. Personal loans and lines of credit can both be secured loans, meaning you borrow against something of value (like a savings account or a boat) to get approved.
…or no collateral. Personal loans and lines of credit can also both be unsecured loans, meaning you qualify based on your creditworthiness and financial situation.
Most importantly, personal loans and lines of credit serve the same purpose: to give you access to cash when you need it.
You could use either one to fund large purchases (or small ones), plan for short- and long-term financial goals, or simply get caught up on bills. That kind of flexibility is great because you could use a personal loan or line of credit to pay for one thing or multiple things.
Personal loan vs personal line of credit: the main differences
While a personal line of credit and a personal loan are alike in some respects, there are several things that set them apart. Here are a few differences:
Interest rates. Personal loans tend to have fixed interest rates, while a line of credit may have a variable rate. A variable rate can move up or down over time, affecting your monthly payment.
Repayment terms. Lenders may offer different repayment terms for a personal loan vs. line of credit. For example, you might be able to repay a personal loan over 60 months but only have 24 months to repay a line of credit.
Loan amounts. There can be differences in how much you can borrow with a line of credit vs. a loan. Lenders might set one limit for loans and another for lines of credit.
Fees. Personal loan lenders can charge origination fees or prepayment penalties. With a line of credit, you might have to pay an upfront or annual administrative fee.
Pro tip: Achieve personal loans have no prepayment penalties or hidden fees of any kind.
Comparing personal lines of credit vs. loans
Personal line of credit
Tends to be higher than loans
Tends to be lower than lines of credit
Payment amount fluctuates as balance changes
Equal monthly installments
Term may be shorter
Term is typically 2–5 years
Can be secured or unsecured
When you're unsure how much you might need, or you want “just in case” access to funds
When you know how much you'll need and want predictable monthly payments
Tips to help you decide between a personal loan and a line of credit
A personal loan or line of credit isn't necessarily better than the other; it all depends on what you need to borrow money for.
Here are a few tips for choosing between a personal loan and a personal line of credit:
Consider what you need to borrow money for, such as emergency expenses, short or long-term goals, or large purchases.
Estimate how much you need to borrow. And if you can't choose an exact number, that's a hint that a personal line of credit might be a better fit.
Calculate how much you can afford to pay toward a loan or line of credit each month.
Think about what kind of repayment term fits your budget best.
It's always a good idea to check the rates and fees you might pay for a personal loan or line of credit; if you're looking for the lowest rate options and fixed payments, you may be better off with a personal loan.
If you'd like to see how much you might pay for an Achieve personal loan, you can get a rate quote online.
Frequently asked questions
What is the minimum credit score for a personal loan or line of credit?
The minimum credit score required for a personal loan or line of credit will depend on the lender. For example, it's possible to get approved for an Achieve personal loan with a minimum credit score of 620. Just keep in mind that a higher credit score can help you unlock lower interest rates for a personal line of credit or a loan.
Can I use a personal loan or line of credit to pay off credit card debt?
Yes, unless your lender specifically says that you can't. In fact, some lenders will even send payment to your creditors for you if you're getting a personal loan or personal line of credit for debt consolidation. Some lenders may even give you a discount on your interest rate for doing so.
How does repayment work for a personal line of credit?
During your draw period (the period you’re allowed to borrow from your credit line), you'll typically need to make minimum payments or interest-only payments. Once the draw period ends, the regular repayment period begins. You'll make equal monthly payments to the lender according to the loan term, calculated to pay off your balance by the end of the loan term. If you don't make payments on time, your lender can charge a late fee. Late payments can also be reported to the credit bureaus, which could potentially hurt your credit score.