Personal Loan and Line of Credit – what’s the difference?
If you’ve only got a minute,
- Personal loans and lines of credit are examples of unsecured Loans.
- A personal loan is a fixed term loan whereas a line of credit is a revolving loan.
- Whether you take up a personal loan or a line of credit, you should always look at your circumstances before committing.
There may come a time in your life when you need to take a loan. Not all debts are bad and taking a loan may sometimes come in handy to bridge a temporary financial gap or for better alternative use of savings to make more money elsewhere.
Loans primarily comes in two forms, secured and unsecured loans. Secured loans require a collateral – something pledged as a security for repayment of a loan, which is to be forfeited in the event of a default.
On the other hand, unsecured loans do not require any type of collateral. Instead, lenders are approved based on a borrower’s creditworthiness. They can be either term or revolving loans. In this article, we will be comparing two types of unsecured loans, Personal Loans and Line of Credit.
What are the differences between Personal Loans and Line of Credit?
• Personal Loans
Personal loans are general purpose loans that are usually interest-payable with a fixed number of payments agreed upon over a specific period. This means that you will pay a fixed amount every month until the end of the loan period. Depending on the lender, Interest rates can range between 3.7% p.a and 4.5% p.a. The loan term can be up to 7 years and there is also a one-time processing origination fee ranging from 1% to 6%. Do also take note that there is an early repayment fee.
DBS Personal Loan allows you to borrow funds up to 10 times your monthly salary with fixed interest rate from as low as 3.88%p.a and 1% processing fee (E.I.R 7.56%p.a) and loan tenures ranging from 1 to 5 years.
• Line of Credit
Lines of credit are revolving loans. They are also known as flexible loans. This means that there is no fixed period on the loan. It is like a credit card whereby the bank offers you money up to a specified limit. The line of credit becomes available for reborrowing once the funds are repaid, and the maximum amount you can borrow is known as the “credit limit”. Another difference between line of credit and personal loans is that for line of credit, interest is only charged when the loan is utilised. Its fees are charged annually. The line of credit can also essentially by seen as standby cash. Depending on the lender, interest rates range between 18.6%p.a and 20.9%p.a. The repayment period can range from daily to monthly or yearly. Also, there is no early repayment penalty.
DBS Cashline is a type of line of credit that allows you to get up to 4 times your monthly salary or up to 10 times your monthly salary if your annual income is up to S$120,000. Interest rates are around 20.5% p.a, which calculates to around 0.06% per day. This is lower than credit card rates.
Should you consider a personal loan or a line of credit?
• Reasons to take up a Personal Loan
Grouping your credit card and high interest debts together can make it easier for you to pay off your balances without getting overwhelmed.
Renovating your home
After spending most of your savings on a home, paying for renovation costs can be difficult. A personal loan can help to provide you with the immediate cash which you need as you prepare to move into your dream home.
Paying Medical Bills
Medical bills are another reason to consider taking up a personal loan. As health conditions are unexpected and depending on your health insurance coverage, you may not be sufficiently covered for the medical bill.
• Reasons to take up a Line of Credit
Alleviate a short-term cash flow problem
A delay in salary could be disruptive to existing expenses. A line of credit can assist to tide you over temporarily. Its rates are lower than credit cards or licensed moneylenders. You will only be charged interest on the amount you need, which could be more appropriate than a personal loan.
Spending on shirts, bags, electronic devices using credit cards can be beneficial because of the rewards they provide. To pay for services such as car maintenance or home renovation a line of credit could be a better option since it is cheaper than a credit card and gives you the flexibility of using the funds only when needed.
The main advantage of using a line of credit is in its flexibility - funds can be drawn and paid off repeatedly. This is a major advantage over fixed-term personal loans which are disbursed in one lump sum. In this way, you only need to borrow what you need as and when you need it.
A personal loan may be better for big-ticket purchases that require a lump sum payment. Unless you intend to carry large balances for long periods of time, a credit card may offer cheaper short-term flexibility compared to a personal line of credit. Additionally, credit card purchases provide a grace period during which no interest is incurred if the balance is paid off in full.
Personal lines of credit and other forms of revolving credit like credit cards, can negatively impact your credit score if you run up a high balance. While a personal line of credit might be an attractive option, there are situations where a personal loan or credit card might be a better choice.
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.