Personal Loans Versus New Line Of Credit

No matter the time of year, holidays or not, the need for additional money may arise. While there are several ways to obtain this extra money, two of the most common ways include opening a new line of credit and taking out a personal loan from a bank. The question posed in this article is - between the two, which is more advantageous? Read on to find out!

Before understanding which is better between a personal loan and new line of credit, it is important to define the two terms as they are closely related. A line of credit is where you have an agreement with a company to borrow a specific amount of unsecured credit for a specific period of time. This amount of money is available for use at any time as long terms of the agreement are met.

Personal loans are money given by the bank on credit. There is no collateral given. The amount that you get is based on your credit rating and they are usually paid off in a short period of time (two to three years). Personal loans can be used for anything that you need it for such as debt consolidation, vacations, medical bills etc. Personal loans have fixed rates and monthly payments until they are paid off. Personal loans are setup differently than short-term loans or online payday loans.

So what exactly is the advantage of one loan over the other?

Let us start by examining the personal loan. A personal loan provides the total sum of money up front, which also comes attached with a fixed interest rate. You will be expected to make a payment each month until the loan has been completely repaid. There will be an end to the loan depending on the length that you and your lender agree upon. The interest rates attached to personal loans are generally much higher than a line of credit. This means that you will pay more interest overall. Also, personal loans are not tax deductible.

Opening a new line of credit has many differences. First and foremost, a new line of credit will give you money as you need it. This allows for more flexible spending while providing money in emergency situations. The interest rate correlated with new credit is adjustable. This means that interest is only charged on the amount of money used. It also varies with the prime rates so it might go up a half a point or so and then drop again. This means that a payment may be a little bit higher one month and then lower the next.

Based on the above information there are several disadvantages that stand out. First of all, with a personal loan the money is received once, and that is it. This means if someone requires additional money, he or she will have to apply for another loan from a bank or credit union. Secondly, a personal loan is not tax deductible whereas in many cases a line of credit can be.

New credit poses disadvantages as well. Interest rates are adjustable, meaning minimum payments are not fixed and can vary even month to month. The inconsistency of knowing what is owed can be a problem if living on a tight budget.