Loan versus line of credit: Which is right for you?

Know these loan basics

Loans are one-time events—you get a lump sum of money, typically for a specific need. They come with a predetermined payment schedule, end date, and interest rate (although the interest rate could be subject to change if it’s variable instead of fixed). 

Different loans for different needs

Common types of loans include student loans, auto loans, mortgages, and other types of personal loans, such as debt consolidation loans. Take some time to research the different types of loans so you can choose the one that makes the most sense for your situation. 

How a line of credit works

Also known as “revolving” credit, a line of credit gives you a set limit you can borrow from again and again—as long as you keep paying back what you owe! Used $5,000 of your $10,000 credit limit? Pay off your full balance, and you’ll be able to borrow up to the full $10,000 without the need to reapply. A line of credit provides more freedom and flexibility than most loans—and simply having one could give you peace of mind because you know it’s there if a borrowing need comes up. 

When a line of credit makes sense

Credit cards are the most common example of a line of credit, but while cards can be great for day-to-day expenses, they typically come with higher interest rates. A personal line of credit, a home equity line of credit (also known as a HELOC), or even a business line of credit may offer better rates for funding bigger goals—like renovating your home or taking your business to the next level!

How to decide

Deciding between a loan and line of credit solutions really depends on your holistic financial situation and what your goals are. Credit cards can be great for racking up rewards—but only if you’re paying your balance every month. Loans typically have lower interest rates, making them better for more expensive needs like buying a car. To benefit your credit score and history, it’s best to have a mix of both loans and lines of credit. Checking with a professional never hurts if you’re unsure which is right for you.