Personal loan vs personal line of credit: what’s the difference?

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When it comes to paying for some expensive things like home renovations, wedding or even a funeral – many people choose to use credit instead of cash. And a loan can be especially useful when expenses are sneaking up on you and you just don’t have enough funds. emergency fund cover the entire cost.

Personal loan and personal line of credit are forms of credit that you might be thinking about. While they may sound like the same thing, they actually have some very important differences.

Read on To choose’s a breakdown of what you need to know about the difference between a personal loan and a personal line of credit.

What is a Personal Loan?

BUT personal loan it is a form of loan that is given to you as a lump sum. You can use it to pay for just about any major purchase – home renovations, funeral expenses, medical bills, or even emergencies if you don’t already have one. emergency fund

People also use personal loans as a form of debt consolidation… Typically, they apply for a personal loan for a specified amount in cash and then use the money to pay off one or more credit card balances who have higher interest rates than the personal loan they just took. This can help you save on interest payments if you take out a personal loan with a low interest rate, for example LightStreamwhich offers rates from 2.49% * if you pay with auto payment

LightStream Personal Loans

On a secure LightStream site

  • Annual Percentage Rate (APR)

    From 2.49% to 19.99% * when subscribing to auto payment

  • Purpose of the loan

    Debt Consolidation, Home Improvement, Car Loans, Medical Expenses, Weddings, etc.

  • Loan amounts

  • Conditions

  • Credit required

  • Creation fee

  • Early payment penalty

  • Late penalty

There isn’t really a clear rule about what a loan should be used for, but usually you will have to explain the purpose of the loan when you apply for it. You might even consider using personal loan for starting a small businessbut just make sure the lender is not prohibiting the use of the funds for commercial purposes (you can read their terms or ask the lender directly).

You will have to repay the loan amount at a fixed equal interest every month for a predetermined period of time (the so-called loan term). Because of this, this is what is known as installment loan… Personal loans are usually available for two to five years, but sometimes they can be repaid within seven years.

Of course there are many options, but you can make sure you get personal loan with the best interest rate comparing different lenders. You can use this comparison tool from Even Financial to determine your best deals. The service is free, safe and will not affect your credit score unless you apply for a loan.

Editor’s Note: The tool is provided and maintained by Even Financial, a search engine and comparison engine that matches you with third party lenders. Any information you provide is passed directly to Even Financial. Select does not have access to the data you provide. Select can receive affiliate commissions from affiliate offers in the Even Financial tool. The commission does not affect the selection in the order of proposals.

What is a Personal Line of Credit?

Like a personal loan, personal credit line (abbreviated PLOC) can also be used at high costs. However, this is the form Revolving loan – like a credit card.

With PLOC, you have a credit limit and can spend up to a specified amount. But as you make monthly payments towards the used balance, your available credit is replenished. Basically, you spend money as needed and only pay interest on what you borrowed. So, since you can get approval for $ 50,000 but only spend $ 30,000, there is less need to use all of the funds (as opposed to a personal loan, where it is important to know exactly how much you need to borrow).

You should be aware of two important stages of PLOC: the draw period and the redemption period. During the draw period, you can borrow as much as you need, but after the draw period ends and the repayment period begins, you will no longer be able to borrow. Paying off debt can often be a daunting task, but we’ve put together a few tips to help you launch a reliable debt repayment plan

How much do you pay in interest?

Personal loans have a fixed interest rate, while personal lines of credit usually have a variable interest rate over time – this will depend on changes in the interest rate. base rate set by the institution that lends you money. But for the most part a higher credit rating can help you get lower interest rates

According to The federal reserveThe current average annual interest rate on a two-year individual loan is 9.58%. ValuePenguin notes that, although variable, the interest rate on PLOC can range from 9.30% to 17.55%, but some lenders, for example First republic, may offer rates from 2.25%. In contrast, the average credit card interest rate is 16.30%, but can be as high as 24%.

However, some credit card issuers offer 0% introductory annual interest rate period that can save you money if you balance transfer pay off a debt or plan to make a large purchase. Just make sure you know how long the offer period is.

IN Citi® Double Cash Card, for example, allows you to transfer the balance without paying interest for the first 18 months (after 13.99% – 23.99% variable). Balance transfers must be completed within four months of the account opening date.

Citi® Double Cash Card

  • Awards

    2% Cashback: 1% on all eligible purchases and an additional 1% after payment of your credit card bill

  • Welcome Bonus

  • Annual fee

  • APR introduction

    0% for the first 18 months on balance transfers; N / A for shopping

  • Regular annual interest rate

    13.99% – 23.99% variable for purchases and balance transfers

  • Balance transfer fee

    Either $ 5 or 3% of the amount of each transfer, whichever is greater

  • Foreign transaction fee

  • Credit required

Are there any commissions?

Personal lender may charge registration fee and / or a prepayment fee (also known as a prepayment fee) if you repay the loan before its maturity. If you are new to retail lending and want to save as much money as possible, you can consider one that has no creation fee, how Discover Personal Loan

And while lenders do not usually charge prepayment fees on personal lines of credit, they do have several other fees that are associated with this particular type of loan. The annual fee during the draw period can range from $ 25 to $ 50. Late payment fees can be around 7.5% of the overdue amount. And if your payment is returned due to insufficient funds in your account, or due to a closed or frozen account, you may also be charged a chargeback fee of at least $ 25.

How should a loan or line of credit be managed?

Whether a personal loan or a personal line of credit is right for you, always make sure you have a plan to pay them back. As a general rule, you should only try to take on debt that you can afford to pay off, but if this happens in some life and your ability to repay the debt is impaired, consulting a financial advisor for personalized advice can help you take the situation under the control.

Also, make sure you are comfortable with the interest rate and maturity dates. Personal loans and personal lines of credit can be powerful tools to help you reach some of your financial and life goals faster, but they should always be handled with caution.

* The terms of your LightStream loan, including the annual interest rate, may differ depending on the purpose, amount, loan term and your credit profile. Excellent credit is required to get the lowest rates. The price is shown with an AutoPay discount. The AutoPay discount is only available before loan financing. Tariffs without AutoPay are 0.50% higher. Subject to loan approval. Conditions and restrictions apply. Advertised rates and conditions are subject to change without notice. Payment example: Monthly payments on a $ 10,000 loan at 3.99% per annum for a period of three years would result in 36 monthly payments of $ 295.20.

Editorial note: The opinions, analyzes, reviews or recommendations expressed in this article are solely owned by the Select editors and have not been reviewed, endorsed or otherwise endorsed by any third party.

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