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Personal Lines of Credit vs. Personal Loan

First Republic Bank
March 8, 2021

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

A personal line of credit and a personal loan are both options for refinancing debt, financing future expenses and achieving financial goals, when using savings may not be preferable or feasible.

First Republic’s Personal Line of Credit – access funds with fixed rates from 2.25% APR (with discounts).

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.

There are plenty of other nuances between the two options, and it's helpful to understand how each one works before choosing.

 

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, 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. Most often used for medical bills, school costs, fixed home repairs, wedding and funeral costs, debt consolidation, and moving costs. May be used for business expenses.

Amount

Between $60,000 and $350,000*

Between $1,000 and $100,000**

Secured or Unsecured

Either

Either

Interest Rates

Usually variable but may be fixed. Average APRs are 9.3% to 17.55%. (First Republic's Personal Line of Credit offers fixed APRs between 2.25% to 3.50%, with discounts¹). Interest is only charged on the amount borrowed.

May be fixed or variable. Average APRs are 5.99% to 35.89%. Interest is included in entire loan amount.

 

Potential Fees

May be fees for annual maintenance, transactions, and late payments. (First Republic does not charge maintenance or prepayment fees.)

Fees typically include origination, prepayment, and late payments.

Borrowing

Can borrow up to the limit for a specific amount of time, often a number of years.

Borrow a fixed amount at the time of loan origination.

Loan Term

10 years on average

2 to 7 years

Repayment

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

Monthly installment payments begin after the loan is issued.

*Varies by bank and creditworthiness; $1,000 to $100,000 on average.

**Average balance for new unsecured personal loans is $6,217.

Personal line of credit

A personal line of credit is a set amount of money from which you can borrow, up to the 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.

Generally, a borrower can use a personal line of credit to cover a range of personal expenses; these might include family planning, covering home expenses and refinancing expensive student loans and auto loans at a lower interest rate.

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 what 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 non-revolving line of credit, the account is closed when the credit line is paid off.

Secured or unsecured

Personal lines of credit may be secured or unsecured. If it’s unsecured, qualification depends on your income, expenses and credit history, including credit report and credit scores. If it’s secured, it also depends on your income, expenses and credit history, as well as collateral you put down, such as real estate property and cash you have 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. First Republic offers both Personal Lines of Credit and HELOCs.

How to access the money

There may be several ways the borrower 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 “branch” 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. It's a safe and immediate way to access the funds.

Payments

After tapping into the credit line, the lender will send you a statement with a minimum payment and due date. That amount will fluctuate based on the amount 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’ll have more access to the line of credit.

For lines of credit that have a repayment period, once the draw period ends, the repayment period with fixed monthly payments begins. If you owe a significant amount, those payments may be significantly higher than what they were during the draw period.

Potential fees

Depending on the issuing lender, there may be a variety of fees associated with the line of credit.

  • Annual maintenance fee. This fee ensures the line of credit is available during the draw period. It may be charged on an annual basis or broken up into monthly increments and is added to the balance.
  • Transaction fee. Although not common, some lenders charge a small fee each time the borrower makes a withdrawal.

When weighing your options across different financial institutions, it’s worthwhile to ask the lender about fees, so you can make an informed decision. First Republic’s Personal Line of Credit, for example, does not have prepayment, origination or maintenance fees. Calculate your rate in just a few minutes.

Interest rates

Broadly speaking, lenders will determine your borrowing limit and personal line of credit interest rate based on several factors, such as your credit score, income and existing debt. If your credit score is in the good or excellent range, the interest rate will likely be lower. If the personal line of credit is secured, collateral is also considered and can lower the interest rate. Generally speaking, you only pay interest on the amount you borrow, which makes it better for expenses that you can’t fully predict.

When weighing your borrowing options, look closely at whether an interest rate for a given financial product is variable or fixed: Interest rates on personal lines of credit are usually variable, which means they’re connected to an index, such as the prime lending rate.

Since the rate can fluctuate, the borrower can find themselves paying more in interest than they expected, in certain market conditions. A fixed interest rate on a personal line of credit account may offer a borrower more certainty: they can anticipate what they will be paying in interest and plan for future goals accordingly.

Common uses

A personal line of credit is useful for financing a variety of expenses. In particular, it can be used to cover large costs such as to:

Personal loans

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 you are eventually at a zero balance.

Secured or unsecured

Like personal lines of credit, personal loans can be unsecured or secured. If it’s an unsecured loan, qualification depends on your capacity and creditworthiness. If it’s a secured loan, qualification also depends on the collateral you put down.

How to access the money

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

Since this is an installment loan, your payments will encompass both principal and interest, and will remain constant each month, though you can pay more to expedite payoff.

Potential fees

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 may also be a prepayment penalty, although this is more common to mortgages or business loans, rather than personal loans; if a borrower pays the loan off earlier than the set term, the lender may charge a penalty to offset for lost revenue. First Republic does not charge a prepayment penalty for its Personal Line of Credit borrowers.

Interest rates

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 likely be, especially for lenders who price their products based on credit risk. 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. Since terms can vary across financial institutions, don’t be afraid to ask detailed questions before you commit.

Common uses

Personal loans are most frequently used to finance expected goods and services, such as:

  • Home improvements, repairs, and remodels
  • A wedding or honeymoon
  • Moving expenses

Why should you pick a personal line of credit versus a personal loan?

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

Personal loan vs. personal line of credit, which is better?

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

Choose 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 Credit – access funds with fixed rates from 2.25% APR (with discounts).

1. Annual Percentage Rate. Rates effective as of 06/15/2020 and are subject to change.

Borrower must open a First Republic ATM Rebate Checking account (“Account”). Terms and conditions apply to the Account. If the Account is closed, the rate will increase by 5.00%. Rates shown include relationship-based pricing adjustments of: 1) 2.00% for maintaining automatic payments and direct deposit with the Account, 2) 0.50% for depositing and maintaining a deposit balance of at least 10% of the approved loan amount into the Account, and 3) an additional 0.25% for depositing and maintaining a deposit balance of at least 20% of the approved loan amount into the Account.

Personal Line of Credit consists of a two-year, interest-only, revolving draw period followed by a fully amortizing repayment period of the remainder of the term. Draws are not permitted during the repayment period. Full terms of 7, 10 and 15 years available.

This product can only be used for personal, family or household purposes. It cannot be used for the following (among other prohibitions): to refinance or pay any First Republic loans or lines of credit, to purchase securities or investment products (including margin stock), for speculative purposes, for business or commercial uses, or for the direct payment of post-secondary educational expenses. This product cannot be used to pay off credit card debt at origination.

Personal Line of Credit minimum is $60,000; maximum is the lesser of $350,000 or debt to be repaid at origination plus $100,000. Line of credit cannot be fully drawn at origination.

The terms of this product may differ from terms of your current loan(s) that are being paid off, including but not limited to student loans. By repaying such loans, you may permanently be giving up tax and repayment benefits, including forbearance, deferment and forgiveness, and you may not be able to re-obtain such benefits if this loan is refinanced with another lender in the future.

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; all lending is subject to First Republic’s underwriting standards. Applicants should discuss line of credit terms, conditions and account details with their banker.

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.