But since we generally make money when you find an offer you like and get, we try to show you offers we think are a good match for you. That's why we provide features like your Approval Odds and savings estimates. Of course, the offers on our platform don't represent all financial products out there, but our goal is to show you as many great options as we can. A line of credit is typically offered by lenders such as banks or credit unions, and, if you qualify, you can draw on it up to a maximum amount for a set period of time.
Once you pay back borrowed funds, that amount is again available for you to borrow. Flexibility is the key here: You can choose when to take out the money, pay it back and repeat — as long as you stick to the terms, including paying off what you borrow on time and in full.
Broadly speaking, you can usually apply for either a loan or a line of credit. With a loan, you get one lump sum of money and start paying interest immediately, regardless of when you use the money. By contrast, a line of credit gives you access to a set amount of money that you can borrow when you need it.
Secured lines of credit are backed by collateral, such as your house or a savings account. When you apply for a line of credit, having better credit scores could help you qualify for a lower annual percentage rate. Some lines of credit may come with fees, such as an annual fee, and limits on the amount you can borrow. A draw period can last several years. Keep in mind, making only minimum payments may cost you more in interest in the long run. As part of the application process for a line of credit, the lender may perform a hard inquiry on your credit reports.
This could temporarily lower your credit scores by a few points. Personal lines of credit are more commonly offered by banks than online lenders. Unsecured personal loans are similar to personal lines of credit, except you pay interest on the full amount you borrow.
Annual percentage rates on personal loans can be lower than on personal lines of credit, and rates are typically fixed. Secured personal loans require you to pledge an asset, like a car or savings, to secure the loan. A business line of credit can be used to cover things like inventory or unexpected expenses. The amount you receive depends on qualifications like revenue and how long your business has been active.
Many of these loans are unsecured, but lenders may require collateral for larger credit lines. Small-business loans are better for large one-time expenses. Unlike revolving lines of credit, a small-business loan gives you a lump sum of cash that you repay over a set period. Business credit cards tend to have lower credit limits than business lines of credit, making them a better choice for small expenses.
But they can come with annual and late-payment fees. A business credit card is a good option for startup businesses. You can use a home equity line of credit for home improvement projects or repairs.
A HELOC is a second mortgage, and the amount you can borrow is determined by the equity in your home, your debt-to-income ratio and credit score. Home improvement loans are unsecured personal loans you can put toward renovations and repairs. Credit cards will always have minimum monthly payments, and companies will significantly increase the interest rate if those payments are not met. Lines of credit may or may not have similar immediate monthly repayment requirements.
Like a traditional loan, a line of credit requires acceptable credit and repayment of the funds and charges interest on any funds borrowed. Unlike a loan, which generally is for a fixed amount for a fixed time with a prearranged repayment schedule, a line of credit has both more flexibility and, generally, a variable rate of interest. When interest rates rise, your line of credit will cost more, not the case with a loan at fixed interest.
There are also typically fewer restrictions on the use of funds borrowed under a line of credit. A mortgage must go toward the purchase of the listed property, and an auto loan must go toward the specified car, but a line of credit can be used at the discretion of the borrower. If you decide that a loan is best for you, finding the best place to borrow can be particularly stressful when you face a financial emergency and you need money in a hurry.
For those with the additional obstacle of less-than-stellar credit, accessing cash quickly may seem even more daunting. Fortunately, there are a variety of emergency loan options that may be available to you even when you have credit problems.
Likewise, a pawnbroker or payday lender does not care what a borrower uses the funds for, so long as the loan is repaid and all its fees are remitted. The differences, however, are considerable. For anyone who can qualify for a line of credit, the cost of funds will be dramatically lower than for a payday or pawn loan. By the same token, the credit evaluation process is much simpler and less demanding for a payday or pawn loan there may be no credit check at all , and you get your funds much, much more quickly.
It is also the case that payday lenders and pawnbrokers seldom offer the amounts of money often approved in lines of credit. And on their side, banks seldom bother with lines of credit as small as the average payday or pawn loan.
Lines of credit are like any financial product—neither inherently good nor bad. On one hand, excessive borrowing against a line of credit can get somebody into financial trouble just as surely as spending with credit cards. On the other hand, lines of credit can be cost-effective solutions to month-to-month financial vagaries or executing a complicated transaction such as a wedding or home remodeling.
As is the case with any loan, borrowers should pay careful attention to the terms particularly the fees, interest rate, and repayment schedule , shop around, and not be afraid to ask plenty of questions before signing.
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