Loans and Line of Credit: Reviewing Funding Options
Depending on your needs, there are many different funding options available to the average financial consumer: a line of credit and loans are two of the more important options, but they have quite different implications.
The right type of financing makes all the difference when you need emergency funding or financing for a special project.
Buying a new vehicle, paying medical bills, or making home repairs are just a few of the things you might need such financing for.
Differences between a Loan and a Line of Credit
A line of credit is more like a credit card, whereas a loan is something granted, used, and repaid on a one-time basis. A line of credit can be borrowed against as often as needed, as long as you pay the balance off completely over time.
Here are some things to consider when seeking a loan or a line of credit:
1. A loan is a lump sum payment
With loans, you get all the money up front to spend as you see fit and you make regular payments to return the balance to the lender. Once payments are complete, the agreement between you and the lender ends.
2. A line of credit has a different structure
Lenders allow you to draw and spend a specific loan amount as you need it, as long as you repay the balance. This is the characteristic that makes a line of credit similar to credit card accounts.
- For instance, you could obtain separate lines of credit for starting a business, making home improvements, or paying medical bills, or get one for all three of your financial needs.
3. Interest rates vary
Interest rates for loans or a line of credit vary from one lender to another. One lender may offer better rates for a line of credit, while another offers the best deal on loans.
- Be prepared to shop around before making a decision between a loan and a line of credit for your funding options. Looking at different options will give you the opportunity to find a lending opportunity and interest rate that is most comfortable for your specific needs.
4. Some lending options have specific purposes
The question to ask yourself is, “What is the purpose of the funding I’m looking for?”
- A line of credit generally has more flexibility in how it is being used. Most loans, however, are granted for specific purposes, like consolidating debt into a single monthly payment or financing a vehicle.
- If you need financing for several different things, a line of credit could be the better choice for you.
- If you’ll be spending the loan amount for one purpose like buying a home, or paying off a car loan, a traditional loan is probably the best option.
5. Be aware of repayment penalties for some loans
Many lenders charge a repayment penalty if a loan is paid off early, since the lender stands to lose profit from the interest they would earn on your loan.
Since lines of credit don’t have a specific term length, they don’t charge penalties for paying more than the minimum monthly amount or paying the entire balance early.
So, what type of lending is right for you? The choice is yours to make.
Depending on the lending institution, you may either have an array of different lending options for one purpose or one specific lending product designed for your unique situation.
It’s wise to ask questions throughout the lending process to be sure you know specifically what you’re applying for. When choosing whether a specific line of credit or loan will meet your needs, the more information you have allows you to find the perfect funding option for your immediate and future needs.