Life has been tough for Roy since his mother had the ghastly accident and now her high medical expenses are reducing his savings away. One of his friends suggested he took a personal loan. A colleague, on the contrary, thought that a personal line of credit would be more appropriate for Roy. He needs to decide between a personal loan and a personal line of credit, strategically weighing the pros and cons of each option.
He must select the most cost-effective option that would meet his needs. Both of these are unsecured financing instruments. In order to evaluate whether an applicant is eligible for an unsecured personal loan, a lender needs to see documents like KYC, income proof, income tax returns, etc.
Difference between Personal Loan and Personal Line of Credit:
There are some significant points of difference between these two types of credit.
- How the borrower receives the loan:
In case of a personal loan, the borrowed amount is disbursed as a large sum of money, all at once. The borrower gets the entire loan amount upfront. Lending institutions, often, have a minimum loan amount that one must borrow. Smaller loans might be difficult to get.
A personal line of credit, however, is different as it revolves credit. This credit option allows the borrower to take the money as and when it is needed. Personal line of credit has a credit limit and a borrower can take as little or as much money as he needs, up to the credit limit.
- Interest Rates:
Personal line of credit usually has a higher interest rate compared to the rate charged on personal loan. This makes personal line of credit a more expensive credit option compared to personal loan. Interest rates on personal line of credit are almost exclusively determined by the earning and creditworthiness of the applicant. The interest rate on personal line of credit also often varies, thus allowing the lender to raise the rate after the amount has been borrowed.
A personal loan, on the contrary, usually has a fixed rate of interest which remains unchanged throughout the term of the loan.
Personal loan can be repaid in a straight-forward and clear manner. The borrowed amount gets completely paid off within the selected repayment period. Repayment for personal line of credit, on the contrary, is not done within a specific time-frame. Roy needs to make his decision on the basis of the differences discussed above and the kind of requirement he has.