Line of Credit vs. Personal Loan
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UPDATED: Sep 19, 2011
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When a borrower is in need of cash fast, there are many options – two of which are a line of credit and a personal loan. Both offer money when it’s needed from a private lender like a bank, but each has its own benefits and consequences and fits a different personal situation.
Borrowers should remember that if they need to purchase something but don’t have the money up front, the first and easiest option is charge the amount on a credit card. This option is only viable, however, if the borrower knows he or she will have the money to pay this charge back when the credit card bill comes. If this is not the case, there are other options.
A personal loan – which can be secured or unsecured by an asset – allows the borrower to take out needed funds in a timely manner, as most will authorize funds on the next day. It offers a fixed term and a fixed rate, making repayment relatively simple. The borrower must pay back the loan in full.
With an unsecured personal line of credit, the individual can borrow funds as he or she needs them. The borrower and the bank from reach an agreement to determine the maximum amount on the loan. Then, the borrower can take out this money periodically during the term of the line of credit without having to reapply for the loan. These loans may have a lower interest rate than credit cards but this rate can still be on the higher side – although these rates are lower with a better credit score.