Personal Line Of Credit Versus Personal Loan: Which Is Better?

Personal line of credit vs personal loan – compare options to find the best fit by reviewing their differences, pros, and cons.

Life has a way of throwing curveballs – from an unexpected car repair to a surprise medical bill or home expense. When the unexpected happens, having access to extra funds can bring peace of mind and help you handle costs without derailing your budget.

Two popular borrowing options are a personal loan and a personal line of credit (PLOC). Although they sound similar, they function differently. This guide breaks down how they work, their pros and cons, and when each one might be the best fit.

What Is A Personal Loan?

A personal loan is a type of installment loan that provides a lump sum of money upfront, which is repaid over a set term with fixed monthly payments and a fixed interest rate. Typically unsecured and lasting 12 to 60 months, it’s a great option for significant expenses like medical bills.

To qualify, lenders usually review factors such as your credit score, income, and debt-to-income ratio.

Pros Of Personal Loans

Here are the top advantages of personal loans:

Fixed Interest Rates

Most personal loans come with a fixed interest rate, ensuring predictable monthly payments throughout the loan term – making it easier to budget compared to variable-rate loans.

Lower Interest Rates

Personal loans typically offer a lower interest rate than credit cards and payday loans, helping you save on interest costs. Rates vary based on creditworthiness, meaning borrowers with good credit can usually secure a better rate.

Suitable For Large, One-Time Expenses

Because personal loans provide a lump sum upfront, they are suited for home renovations, car repairs, or debt consolidation, allowing you to cover expenses without dipping into your savings.

Cons Of Personal Loans

Personal loans also have some disadvantages, including the following:

Immediate Repayment

Once the loan is funded, repayment begins right away, and interest starts accruing from the disbursement date. This can affect your cash flow, so it’s important to ensure your budget can handle the consistent payments throughout the loan term.

Less Flexibility

After receiving the lump sum from a personal loan, additional funds aren’t available without applying for a new loan. This means if unexpected expenses arise later, you may need to go through the whole process again – so it’s important to plan ahead and borrow an amount that covers your anticipated needs.

Origination Fees

Some lenders charge origination fees ranging from 1% to 8% of the loan amount, which are either deducted from the loan amount or added to the total repayment, increasing the overall cost.

Important: A+FCU doesn’t charge origination fees on personal loans, so you receive the full loan amount to use as needed.

What Is A Personal Line Of Credit (PLOC)?

A personal line of credit (PLOC), also known as a credit line, is a flexible borrowing option that allows you to access funds up to a set credit limit as needed. Unlike a personal loan, it has a variable interest rate, which can cause your payments to fluctuate. However, a PLOC lets you withdraw smaller amounts, paying interest only on what you use.

Think of it like a credit card with lower interest rates and more borrowing power, which is excellent for ongoing projects or unexpected expenses.

Pros Of A PLOC

Here are some advantages of a PLOC:

Flexible Borrowing

A PLOC gives you the freedom to withdraw funds whenever you need them, up to your approved limit. This makes it ideal for handling ongoing projects, unpredictable expenses, or even just having a financial safety net in place. You’re not locked into using the full amount all at once, so you can borrow in stages as costs arise.

Interest-Only Payments During Draw Period

With many lenders, a personal line of credit includes a “draw period” (often 5 to 10 years) where you can make interest-only payments before full repayment begins.

The A+ Preferred Line of Credit from A+FCU works differently – it’s open-ended, with no set draw period. Payments are calculated based on the amount withdrawn, and interest is charged only on that amount as well, providing you with ongoing access to the funds you need.

Lower Interest Rates Than Credit Cards

While rates vary based on credit score and lender, PLOCs generally have lower interest rates than credit cards, making them a cost-effective alternative for short-term borrowing.

Cons Of A PLOC

Here are the top disadvantages of a PLOC:

Variable Interest Rates

PLOCs often come with variable interest rates, which means the rate you pay can change over time based on market conditions or the lender’s benchmark rate. While your rate may decrease and save you money, it can also increase without much warning, causing your monthly payment and total borrowing cost to rise. These fluctuations can make it harder to predict and manage your budget, especially if you’re relying on a steady payment amount.

More Fees

In addition to interest charges, some lenders apply extra costs that can add up quickly. These may include annual fees for keeping the account open, withdrawal fees each time you access funds, or inactivity fees if you don’t use the line of credit for a certain period. Each fee might seem small on its own, but together they can significantly increase the overall cost of borrowing and reduce the value of having a line of credit available.

Important: There are no fees when you get an A+ Preferred Line of Credit.

Strict Qualification Requirements

Lenders typically require a solid credit score, steady income, and proven history of responsible borrowing to approve a PLOC. These standards can make it challenging for individuals with lower credit scores or limited credit history to qualify.

Potential For Overspending

Since a PLOC provides ongoing access to available credit, it can be tempting to borrow more than you truly need. Without careful tracking and repayment planning, this can quickly lead to higher balances and long-term debt.

Key Differences Between Personal Loans & PLOCs

Personal loans and personal lines of credit (PLOCs) differ in structure, interest rates, repayment terms, and best uses.

Structure

A personal loan provides a lump sum upfront that must be repaid in fixed installments over a set period, typically 12 to 60 months. In contrast, a PLOC offers revolving credit, allowing borrowers to withdraw funds up to a predetermined limit as needed.

Interest Rates

Personal loans have fixed interest rates, meaning you pay the same amount every month. This stability makes budget planning easier. However, PLOCs typically come with variable interest rates that fluctuate based on market conditions. While this can lead to lower payments initially, you risk higher costs if interest rates rise.

Repayment Terms

Personal loan payments remain consistent throughout the loan term. In contrast, PLOC payments vary based on how much is borrowed and current interest rates. During the draw period, borrowers may make interest-only payments, while the repayment period requires paying back the principal.

Best Uses

Unsecured loans, such as personal loans, are best for large, planned expenses, such as home renovations or debt consolidation. PLOCs work well for ongoing or unpredictable costs, like home goods purchases or business expenses, providing financial flexibility when needed.

Which Is Better: Personal Loans Or PLOCs?

Choosing between a personal loan and a personal line of credit depends on your needs, budget, and how you plan to use the funds.

• Personal Loan: Best for large, one-time expenses such as home renovations, car repairs, or debt consolidation. With fixed monthly payments and a fixed interest rate, a personal loan provides predictability, making it easier to plan your budget.
• Personal Line of Credit (PLOC): Ideal for ongoing or unexpected expenses that arise over time, like phased home projects or seasonal costs. A PLOC offers flexible access to funds and interest is charged only on what you borrow. However, payments can fluctuate due to variable interest rates, which can make budgeting more challenging.

Key Considerations: If you need a lump sum and want stability in payments and interest, a personal loan is usually the better choice. If flexibility and ongoing access to funds are more important – and you’re comfortable managing variable payments – a PLOC may be the right fit.

Both options can help you reach your financial goals, but understanding how each works will make it easier to pick the right one for your situation. To help guide your decision, here are 16 questions to ask before proceeding with either a personal loan or PLOC.

Ready To Secure Your Personal Loan With A+FCU?

No matter what your plans are, A+FCU offers competitive rates for both the A+ Personal Loan and A+ Preferred Line of Credit. Our simple application process, knowledgeable lending specialists, and commitment to member-focused service make borrowing easy and stress-free.

With no fees and personalized guidance every step of the way, A+FCU is here to help you get the funds you need – quickly, safely, and on terms that work for you.

Membership required. Programs, rates, terms, and conditions are subject to change without notice. Normal lending criteria apply. All loans subject to credit approval. Rates are subject to credit score and normal credit underwriting factors. Cannot have both an open A+ Line of Credit and an open A+ Preferred Line of Credit. A+ Preferred Line of Credit is an open-ended line of credit. Minimum loan amount of $1,500 for A+ Personal Loan and A+ Preferred Line of Credit.