Most lenders spend a large portion of their resources trying to find new products to market to their clients, however, the two main forms of debt that people access are loans (namely personal loans) and personal lines of credit or HELOCs. Both of these are extremely popular because it is easy to apply for them and there are no restrictions placed on what can be done with the money. However, the fact that they share one or two common traits does not make them equivalent. Each of them is designed to cater to different types of individuals and, as a result, they offer different advantages. This having been said, we will look at how the two compare, and also try to establish which one is better.
Loans vs Lines of Credit
- Both loans, as well as lines of credit, allow individuals to borrow money without restricting its use;
- Both can have either fixed or variable interest rates;
- Both can be refinanced or consolidated if the borrower is unable to repay the money on time;
- When getting a loan, borrowers get all the money at the same time and have to pay interest until the end of the agreement or until they repay it. On the other hand, when getting a line of credit, the borrower gets access to a bank account that contains all the money that he can borrow. However, he only pays interest for the amount that he withdraws from that account;
- Lines of credit are almost always secured. They require collateral that is equivalent in value to the amount of money that the borrower gains access to. Loans, however, can also be unsecured, provided that the borrower has a good credit rating;
Advantages of Loans
Loans are great for specific expenses. They are useful when the borrower knows the exact amount of money that he needs. Furthermore, the fact that they can be unsecured makes them considerably easier to get than lines of credit. It is also important to mention that loans, especially personal ones, tend to be easier to refinance and consolidate because they have lower values.
Loans are usually the recommended choice for individuals who are planning to get a new car, pay for expensive household appliances or get a new phone/laptop.
Advantages of Lines of Credit
Lines of credit offer more flexibility than loans in the sense that the borrower only pays interest for the money that he withdraws. This makes them a better option for those who cannot estimate the total cost of their expenses. These products are also great for long-term expenses, such as home renovation projects, long holidays, recurring medical treatments, and others. Some individuals have also recently started using them as a financial safety net in case their income is not enough to cover all of their monthly expenses.
When compared to loans, lines of credit give borrowers access to considerably more money, however, they imply greater risk. If a borrower is unable to repay the line of credit and is not eligible for refinancing or debt consolidation, the lender will be able to take possession of the collateral.
Which One Is Better?
Deciding which of the two is better will boil down to the needs of each borrower. Some may find that they need the flexibility offered by the line of credit, while others may simply not be eligible to get one, on account of the fact that they do not have anything to offer as collateral. It is a matter of case and preference.