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Personal Line of Credit vs. Personal Loan

First Republic Bank
December 20, 2022

  • A personal line of credit (PLOC) is a form of revolving credit that allows a borrower to access cash as needed throughout the draw period, during which only minimum monthly payments are required.
  • A personal loan is an installment loan in which a borrower receives a lump sum of cash that they repay, with interest, over a preset period that generally begins soon after the loan has been disbursed.
  • Personal loans and lines of credit both offer unique benefits that make sense for different situations.

For many individuals, the prospect of taking on a personal loan or a personal line of credit can seem daunting or counterintuitive; moreover, both financial products are different types of loans, and it’s easy to get the two confused.

Personal lines of credit and personal loans are both options for refinancing debt, financing large expenses and achieving financial goals without dipping into savings.

First Republic’s Personal Line of Credit1 – access funds with fixed rates from 3.95% APR (with discounts)2.

What’s the difference between a personal line of credit and a loan?

The main difference between a personal line of credit and a personal loan is that a line of credit enables you to borrow incrementally, while a loan gives you a lump sum of cash all at once.

However, there are plenty of other nuances between the two options, and it’s helpful to understand how each one works before choosing the one that works best for you.

Personal line of credit

A personal line of credit is a set amount of money from which you can borrow, up to a predetermined limit, for a given period of time, referred to as your draw period. It can be a good way to ensure that you have access to funds for anticipated and unanticipated expenses.

With a personal line of credit, you take from the available balance only the amount you need during the draw period, and interest only accumulates on the money you borrow. A line of credit is often revolving, which means that as soon as the debt is repaid, you can borrow up to your credit limit again without going through another loan approval process. For a nonrevolving line of credit, the account is closed when the credit line is paid off.

Personal loan

A personal loan is money that you borrow from a lender, which you repay in fixed monthly payments over a set time period. If you know you’ll need a large sum of money all at once to cover something necessary that you want to pay over months or years, an affordable personal loan might make sense. All loans have payment terms, which is a fixed time period in which the borrower must repay the principal (plus interest and fees) charged by the lender. Each time you make a payment, the balance is reduced until the loan is repaid in full.

Use the table below to quickly compare each product before diving in deeper.

 

Personal Line of Credit

Personal Loan

Purpose

Short- to mid-term financing for a variety of purposes. Often used for big-ticket consumer goods, education costs, ongoing home enhancements, family planning and medical expenses. Also can be used for debt consolidation and loan refinancing. Depending on the bank, it may not be used for business expenses.

Short- to mid-term financing, typically taken out for specific purposes or as a pool of funds for costs that might arise. It’s most often used for medical bills, school costs, fixed home repairs, wedding-related or funeral expenses, debt consolidation and moving costs. It may be used for business expenses.

Loan Amount

This may vary by lender and applicant’s creditworthiness.

This may vary by lender and applicant’s creditworthiness.

Secured or Unsecured

Either, and may vary by lender

Either, and may vary by lender

Interest Rates

The rate is usually variable but may be fixed.

The rate may be fixed or variable.

Potential Fees

There may be fees for annual maintenance, transactions and late payments.

Fees typically include origination, maintenance, prepayment and late payment penalties.

Borrowing Limit

One can borrow up to the limit for a specific amount of time, often a preset number of years known as the draw period.

One can borrow a fixed amount at the time of loan origination.

Repayment Structure

Typically, monthly minimum payments start after drawing on the funds. Then monthly installment payments begin after the draw period ends.

Typically, monthly installment payments begin after the loan is issued.

Secured or unsecured

Whether or not a lending product is secured can play a key role in your decision to borrow. Though you may need extra cash to achieve a key financial goal, you may not want to use your property — your house or your car, for example — as collateral to do so.

  • Personal line of credit: Personal lines of credit may be secured or unsecured. If it’s an unsecured line of credit, qualification depends on your income; expenses; and credit history, including your credit report and credit scores. If it’s secured, it depends on the same factors, plus the collateral you put down (such as real estate property and cash tied up in investment accounts). Note that a personal line of credit is different from a home equity line of credit (HELOC), which is a loan based on your home’s value beyond what you owe on it.
  • Personal loan: Like personal lines of credit, personal loans can be unsecured or secured. If it’s an unsecured loan, qualification depends on your financial capacity and creditworthiness. If it’s a secured loan, qualification also depends on the collateral you put down.

How to access the money

Regardless of how you choose to borrow, accessing the cash you’re borrowing generally involves a similar process with both personal loans and personal lines of credit. Lines of credit, however, may afford you a bit more flexibility, depending on the lender.

  • Personal line of credit: There may be several ways you can access the funds, depending on the lender’s policies, during the draw period. A lender may provide you with special checks that you can write against the line of credit or a card that works like a credit card. Some lenders may have physical locations where you can withdraw the funds in the form of cash. Another option is to use a lender’s online platform. With an electronic transfer, you can shift money from the line of credit into your checking or savings account.
  • Personal loan: After the loan is granted, the lender will transfer the funds into your deposit account, and you can use the money for its intended purpose. Alternatively, if you took it out specifically for debt refinancing, the lender may send the funds directly to your creditors.

Payments

Because a line of credit is a form of revolving credit, similar to a credit card, the repayment process works quite differently from a personal loan, which is repaid in fixed monthly installments. This tends to be another crucial consideration when deliberating between the two lending products.

  • Personal line of credit: After accessing the credit line, you’ll get a statement with a minimum payment and due date. The amount will fluctuate based on how much you borrowed. Depending on the lender, payments may be interest-only or encompass principal and interest. Each time you make a principal payment, your account will be credited, and you can borrow that money again. For lines of credit with a repayment period, fixed monthly payments begin once the draw period ends. If you owe a significant amount, those payments may be much higher than what they were during the draw period.
  • Personal loan: Since a personal loan is an installment loan, you’ll pay a consistent amount that encompasses both principal and interest each month. You can pay more than the minimum amount required to expedite payoff.

Potential fees

Most forms of credit charge some fees, and neither personal lines of credit nor personal loans are exceptions. Both charge interest, which is arguably the most noteworthy fee you’ll see. Beyond that, fees vary by lender — and certain fees, such as origination fees, can be avoided altogether.

  • Personal line of credit: Depending on the issuing lender, there may be a variety of fees associated with the line of credit. Annual maintenance fees ensure the line of credit is available during the draw period; they may be charged annually or broken up into monthly installments and added to the balance. Transaction fees may also be charged upon withdrawal, though these are uncommon. Certain lenders may not charge the above fees at all.
  • Personal loan: In addition to interest charges, other fees may be associated with the loan. Some lenders will charge an origination fee to grant the loan. You would either pay it upfront or have it added to the balance. There could be a prepayment penalty, although this is more common with mortgages or business loans than personal loans; if a borrower pays the loan off earlier than the set term, the lender may charge a penalty to offset lost revenue.

What fees are associated with First Republic’s Personal Line of Credit?

First Republic’s Personal Line of Credit does not charge prepayment or origination fees. Other related fees, such as checking account maintenance fees, may apply.

Interest rates

Interest rates for both personal lines of credit and personal loans can vary widely by lender and the creditworthiness of the borrower. The exact rate you’ll pay depends upon several crucial variables, so don’t be afraid to ask detailed questions before you commit to either option.

  • Personal line of credit: Broadly speaking, lenders will determine your line of credit’s interest rate based on several factors, such as your credit score, income and existing debt. Providing collateral, as required by a secured line of credit, may lower your interest rate. It’s also important to note that personal lines of credit generally have variable interest rates, which can fluctuate alongside market conditions. Look for a line of credit with a fixed interest rate to help remove some unpredictability from the equation.
  • Personal loan: Every lender has its own set of criteria when determining interest rates for personal loans; generally, the more positive your credit history, the better the rate will be. Loans with shorter terms may have lower interest rates because the financial institution assumes less lending risk, but this isn’t always the case. Moreover, the interest rates on personal loans can be fixed or variable over the duration of the term.

Common uses

Given their flexibility, lines of credit are often relied upon to finance things that may involve unexpected expenses. Personal loans tend to be a better fit for fixed expenses, since they’re disbursed in a lump sum.

Note: By refinancing student loans, you may permanently be giving up tax and repayment benefits, including forbearance, deferment and forgiveness. Please consider this as you make a decision to refinance student loans, and talk to a banker if you have any questions. Currently, all payments for certain types of federal student loans are suspended potentially until June 30, 2023, per an executive order by the President. Interest will not accrue during this time period. For more information, please visit ed.gov.

Personal loan vs. personal line of credit: Which is better?

When making the decision to borrow money, it’s always best to consider the available options. Understand and weigh the advantages of both a personal line of credit and a personal loan before choosing one.

We always encourage you to speak with a qualified financial and tax advisor to ensure you’re making the right decision for your unique needs.

Type of Credit

Advantages

Considerations

Personal Line of Credit

  • Flexible access to a potentially large sum of money
  • Interest is applied only on the borrowed sum
  • If the draw period is interest-only, small monthly payments during that time frame
  • Strong credit history is usually required
  • Can negatively impact credit scores if balance nears the credit limit
  • Payments increase if a balance remains after the draw period

Personal Loan

  • Fixed payments can make budgeting easy
  • No danger of credit scores being impacted by high debt to credit limit ratios
  • May be available to borrowers with less than perfect credit
  • Applied interest can’t be avoided
  • Monthly payments can be large, especially for loans with short terms
  • Higher interest rates may apply high if the borrower’s credit score is low

Choosing what’s best for your financial goals

Navigating personal finances can be a complicated process, but you don’t have to go through it alone. Personal lines of credit and personal loans have their unique advantages, and you may require one (or both) to get to the next milestone in your life. Do your research, ask the right questions and choose the lending partner that will give you peace of mind and flexibility to reach your personal and financial goals.

First Republic’s Personal Line of Credit1 – access funds with fixed rates from 3.95% APR (with discounts)2.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of use.

Contact your legal, tax and financial advisors for advice on deciding whether this is the right product for you. Terms and conditions apply.

Product is not available in all markets. For a complete list of locations, visit firstrepublic.com/locations. Applicants must meet a First Republic banker to open account. This is not a commitment to lend. Loan approval is subject to a completed application with associated documentation and confirmation that income, liquidity, credit history and other application information meet the minimum requirements for this product. Applicants should discuss line of credit terms, conditions and account details with their banker.

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