The Difference between a Personal Loan and a Line of Credit
While it is true that many consumers get into debt troubles because of mismanaged loans, in reality, loans can become lifelines, and may be the best financial decision you make. People take loans to fund major purchases or investments that come at a time when their savings are not sufficient enough to cover the costs.
In the Philippines, there are generally two personal financing options: personal loans and lines of credit. Each has a unique set of pros and cons. Check them out.
A personal loan is offered to the borrower as a lump-sum amount of money. With a personal loan, you pay interest on the principal amount (the initial amount borrowed) at a fixed or variable interest rate. The loan is paid off over a period of time agreed with your lender.
With personal loans, there is more certainty regarding the amount you are borrowing and the payments due across the time of the loan.
Line of credit
A line of credit is a loan that is pre-approved before the borrower needs it. An approved amount of loan is readily accessible any time and can be drawn down at any time it is needed. It works like the credit limit offered by credit cards. The borrower has the option to withdraw the full amount or just a portion of it.
One benefit of this product is its flexibility. The borrower could use the line of credit only when he really needs the money. If there is no need for funding, the amount does not need to be paid for. On the plus side, the borrower will only need to pay interest charges on the withdrawn amount and not on the credit limit of the facility. The facility can also stand by and not incur charges if not used or withdrawn. It is like applying for access to extra funds long before there is a need for funding.
Want to know more about personal loans? Read now about these 4 things you should know before taking out a personal loan.