Personal Loan vs. Line of Credit: What’s the Difference?

When it comes time to pay for a major expense, you’ll likely compare the options of a personal loan vs. a line of credit.

Both provide you with access to funds, but they work quite differently. While a personal loan provides an upfront lump sum with fixed payments, a personal line of credit (PLOC) offers flexible, ongoing access to money that you can borrow from as needed. Choosing the right option depends on how much you need, whether your expenses are fixed or uncertain, how long you need access to funds, and how predictable you want your payments to be.

Our loan experts are here to help explain the difference between personal loans (installment debt) and personal lines of credit (revolving debt) to help you borrow with confidence.

At a Glance: Difference Between Line of Credit and Loan

Here’s a quick overview of the main differences between these options you can refer back to as a convenient guide:

Funding:

• Personal loan: Upfront lump sum
• PLOC: Draw funds as needed, up to a limit

Repayment:

• Personal loan: A fixed term that begins immediately
• PLOC: A draw period followed by a repayment period

Interest:

• Personal loan: Usually a fixed rate
• PLOC: Often a variable rate

Payment predictability:

• Personal loan: Predictable monthly payments
• PLOC: Payments can fluctuate

Best use cases:

• Personal loan: One-time expenses
• PLOC: Ongoing expenses

What Is a Personal Loan?

Personal loans, like the ones we offer at Tower Loan, are traditional installment loans with set amounts and fixed repayment terms. When you take out a personal loan, you receive the full loan amount in a single disbursement. Some lenders may charge an origination fee.

A personal loan works by you making fixed monthly payments over a set period, commonly between one and seven years. Your interest rate and payment amounts stay the same throughout the entire loan term.

People often use personal loans for medical bills, moving expenses, home repairs, car repairs, debt consolidation, and major purchases.

Pros of a Personal Loan

• Fixed rate that never changes
• Predictable monthly payments
• A clear payoff timeline

Cons of a Personal Loan

• Interest immediately accrues on the full loan amount
• Some lenders charge fees
• Less flexibility if your costs change mid-project

What Is a Personal Line of Credit (PLOC)?

With all of this in mind, now you might be wondering, “What is a line of credit?” and “How does a line of credit work?”

A PLOC is a revolving credit account that lets you repeatedly borrow money up to a set limit. The first phase of a PLOC is the draw period, in which you can borrow money from the line, and minimum payments may apply. Then comes the repayment period, during which you must pay the remaining balance, usually without any new draws allowed.

People often use PLOCs for extensive home renovations, ongoing medical costs, multi-phase projects, and emergency buffer funds.

Pros of a Personal Line of Credit

• Flexibility to only borrow what you need, when you need it
• Reusable credit as you repay the balance
• The potential to lower your total interest if you only use part of the limit

Cons of a Personal Line of Credit

• Variable, unpredictable interest rates
• Payments that fluctuate and are hard to budget for
• Potential annual or transaction fees
• Stronger credit is often required than for personal loans
• Potential to overspend without an established plan

Key Differences: Line of Credit vs. Loan

1. How You Receive the Money

One of the main differences between a personal loan vs. line of credit is how you receive the money. With a loan, you get one deposit in a fixed amount. But with a PLOC, you borrow money in chunks on an as-needed basis.

2. How You Pay Interest

Another line of credit vs. loan distinction is how interest is charged. For loans, interest is applied to the full borrowed amount from the start. For PLOCs, interest only applies to your outstanding balance.

3. Payment Structure

There is also a difference in payment structure between a personal line of credit and a personal loan. Loans come with stable payments and a clear payoff date. However, PLOCs have varying payment amounts based on the current balance and interest rate.

4. Rates, Fees, and Overall Cost

When comparing loans and lines of credit, also look at the full APR and fee schedule, not just the headline rate. For loans, check the APR and any applicable origination fees. For PLOCs, watch for variable APRs, annual fees, and transaction fees.

5. Access and Credit Impact

Another difference between a line of credit and a loan involves the impact on your credit score. Ultimately, both options can impact your score.

Personal loans impact your payment history and installment debt. Meanwhile, PLOCs affect your credit utilization like a standard credit card would, which can lead to more month-to-month score movement.

When a Personal Loan Makes the Most Sense

You may be best off getting a personal loan if:

• You want the same payment each month
• You want a clear payoff date
• You know exactly how much money you need to borrow
• You’re consolidating high-interest debt

Examples of real-life scenarios that work well with personal loans include paying for a medical procedure with a final, known bill and consolidating other debts into a single monthly payment.

When a Personal Line of Credit Makes More Sense

However, you might choose a PLOC if:

• Your costs are uncertain or spread out over a long period of time
• You are comfortable with variable payment amounts
• You want consistent access to funds without borrowing a lot all at once
• You only want to pay interest on the money you use

Example scenarios that make sense for PLOCs include making home improvements with an unknown final cost and creating an emergency buffer with a clear plan.

Five Questions to Help You Decide on Personal Loan vs. Line of Credit

Still not sure how to decide between a personal loan and a line of credit?

Answer these five questions to assess where you’re at financially right now:

1. Is your borrowing need for a one-time use or ongoing?
2. Are your costs tight or flexible?
3. Are you comfortable with fixed or variable payment?
4. How do personal loans vs. PLOCs compare on APR, fees, terms, and funding speed?
5. How much would your budget be strained if interest rates increase?

Alternatives to Loans and Lines of Credit

However, it’s important to be aware that there are additional options to consider besides just a line of credit vs. a loan.

Here are some alternatives:

• 0% intro APR credit cards you can pay off quickly
• 401(k) loans, being mindful of the risks and tradeoffs
• Buy now, pay later programs
• Emergency savings account
• HELOC or home equity loan to use your home as collateral

Common Mistakes to Avoid

As professionals in the financial industry since 1936, we recommend avoiding these common borrowing mistakes:

• Borrowing more than you really need
• Overlooking fees that increase your total borrowing cost
• Opting for variable rates without being financially prepared for those increases
• Relying on revolving debt for long-term debt without a plan for payoff

Personal Loan vs. Personal Line of Credit FAQs

Below are answers to the most common questions we receive about deciding between a personal loan and a line of credit. If you have additional questions, please contact a local office near you.

You can also learn more and handle many loan-related tasks by using the Tower Loan app.

Which is cheaper: a personal loan or a personal line of credit?

It depends upon your unique situation. A personal loan may be cheaper long-term if you make predictable payments on time to pay off the full upfront amount. But if you borrow only small amounts very occasionally over time, a PLOC could reduce your interest costs.

Is a PLOC the same as a credit card?

No. Both financial tools are considered to be revolving credit. However, PLOCs have different fee structures, limits, and rates than credit cards.

Can I use either for debt consolidation?

Yes. However, a personal loan is typically the best choice to consolidate debt because it provides a lump sum to pay off your balance and creates a fixed payment plan.

Do personal loans or lines of credit require collateral?

Not necessarily. Many personal loans and lines of credit are unsecured, which means they don’t require collateral. Terms vary by lender, but qualifying for an unsecured loan may be more difficult if you have poor credit.

Which option is easier to qualify for with fair credit?

Qualification standards vary by lender. However, personal installment loans are often more accessible than unsecured lines of credit for many people.

At Tower Loan, we regularly work with people in all credit situations to get them the money they need quickly and affordably.

What should I look for when comparing offers?

Regardless of whether you choose a personal loan or a PLOC, make sure to compare the APRs, fees, terms, draw periods, payment structure, and funding speed.