Personal Line of Credit vs Personal Loan: Which is Right for You?

If you’re thinking about borrowing money, personal loans and personal lines of credit are two common options. Both can be helpful tools, but they differ in how you access money and the interest you pay. Whether you want to consolidate debt or finance a large expense, the article below will help you determine whether a personal loan or line of credit is best for your financial needs.

Key considerations

• Personal loans are better for large, one-time expenses, while personal lines of credit are better for recurring purchases that require flexibility.
• Both options offer potentially lower interest rates than credit cards, especially for prime borrowers or high-earning individuals.
• Consider the cost implications: personal loans ensure predictable payments, whereas lines of credit allow you to pay interest only on the amount you borrow, but the rate can change.

What is a personal loan?

A personal loan is a financial product offered by a lender—typically a bank or a financial institution—that allows you to borrow a lump sum of money and repay it in fixed monthly installments. Interest rates on personal loans can vary based on factors such as your credit score and credit history. Personal loans are generally unsecured, meaning they do not require collateral. 

Personal loans can be utilized for a variety of purposes, such as:

• Consolidating high-interest debt
• Financing a home improvement
  
• Paying for a single large purchase or major life event
• Covering medical expenses

FYI: If you are a high-income professional looking to consolidate debt, explore BHG personal loans.

What is a personal line of credit?

A personal line of credit is a loan offered by banks and credit unions, and it allows individuals to access funds up to a predetermined limit. Unlike a personal loan, which provides a lump sum, a personal line of credit lets you withdraw money as needed, paying interest only on the amount used. Unlike a fixed-term loan, lines of credit have a draw period that allows you to borrow against your credit limit whenever you need it, making them a useful tool if your financial needs change over time.

Personal lines of credit are commonly used for:

• Emergency expenses 
• Ongoing, irregular, or seasonal expenses
• Medical bills
• Overdraft protection

How do interest rates and terms compare?

When comparing personal loans versus lines of credit, it’s important to consider the interest rates and the repayment terms. 

Personal loan vs line of credit interest rates

Personal loans typically have fixed rates, meaning the rate will remain the same throughout the life of the loan. This provides predictable monthly payments that are easier to budget and manage. Conversely, personal lines of credit often come with variable rates that can go up or down according to market conditions.

Personal loan vs line of credit repayment terms

Repayment terms for personal loans are also fixed. You’ll have a set monthly schedule for paying back the loan, which can help you manage your debt and plan for the future. Personal lines of credit function similarly to credit cards in terms of repayment, allowing you to borrow money, repay it, and then borrow again—as long as you stay within your pre-approved credit limit. Your minimum monthly payments will vary based on the interest rate and amount withdrawn.

When you apply for either solution, the lender will assess your creditworthiness to determine how much you can borrow and on what terms.

Individuals with good credit scores, sufficient income, and a history of responsible financial management are more likely to be approved for higher loan amounts and lower interest rates. Some consideration is also given to your debt-to-income ratio.

FYI: Personal loans through BHG offer tailored financing with the ability to extend repayment terms to 10 years^1,2, which can help keep your monthly payments low. Plus, you can check your rate in seconds without impacting your credit score.³

What are the pros and cons of each?

When comparing lending options, consider how much you can borrow, how you’ll access the money, and how you'll repay it. Each option has its advantages and disadvantages. 

The table below outlines some key differences between personal loans and lines of credit. 

When should you choose one over the other?

Many people opt for a personal loan because they can tailor financing to their needs and budget with flexible repayment terms. Once you select your loan amount and repayment terms, the monthly payment stays the same. 

A personal loan may be more affordable in the long run because you lock in an interest rate for the entire loan term. For example, your rate and monthly payment won’t increase, even if the federal funds rate rises while you’re repaying a personal loan.

Here are a few situations where a personal loan may make more sense: 

• You have a one-time financing need, especially if it’s over $50,000.
• You want to lock in a fixed interest rate and prefer to simplify budgeting with one consistent payment.
• You want to consolidate debt, such as high-interest credit cards, medical debt, personal loans, etc. 
• You have a strong credit profile and can qualify for a lower interest rate and more favorable terms.

While personal loans offer flexibility in terms of repayment, personal lines of credit have more flexibility in how and when you can borrow money. If you are unsure how much you will need and/or when you will need it, a personal line of credit allows you to access money more frequently.

Here are a few scenarios where it may be better to opt for a personal line of credit over a personal loan:

• You have multiple financing needs over the next two to five years and want to be able to access funds as necessary (and more than once).
• You can manage the uncertainty of variable rates and adjust your budget accordingly.
• You can avoid loan offers with higher variable APRs using your good or excellent credit.
• You only want to pay interest on what you borrow each time rather than the full available amount.

How can BHG Financial help you?

If you are exploring personal loans, particularly for the purpose of debt consolidation, BHG Financial can help. We understand how stressful it can be to find an affordable borrowing solution that also has a predictable and straightforward repayment structure. That’s why we offer personal loans specifically designed for borrowers who want to secure financing at a low fixed rate.

• Finance a larger amount: Most lenders offering personal loans and personal lines of credit can only finance between $1,000 and $50,000, but BHG can fund larger loan amounts up to $200,000.¹
• Establish a predictable repayment schedule: We work with you to set repayment terms that fit your budget and help keep monthly payments low. Unlike lines of credit, BHG personal loans come with extended repayment terms of up to 10 years^1,2 and fixed rates, so you know exactly how much you need to repay. 
• Streamlined application process: Our application process is designed to be efficient, allowing you to get the funds you need quickly. You can prequalify online in minutes. This will not impact your credit score.³

Ready to see what’s possible? Use our quick and easy payment estimator to get your personalized loan estimate in just seconds.

Personal line of credit vs personal loan FAQ

Can I use either option for home improvement?

Yes, a personal loan and a personal line of credit can be used for home improvement projects. For example, a personal loan provides a lump sum that can be used to pay for a specific renovation upfront, while a line of credit can be used to pay for ongoing or phased projects as you start them. 

Which is better for recurring expenses?

A personal line of credit is generally better for recurring or ongoing expenses because it allows you to borrow, repay, and borrow again as needed. You only pay interest on the amount you're currently using.

How does credit score affect approval for each?

Your lender will primarily rely on your credit score, income level, and amount of existing debts to assess your creditworthiness and determine whether you qualify for either financing option. Applicants with prime credit and higher incomes have better chances of qualifying for the lowest rates and more favorable terms. Some consideration is also given to your debt-to-income ratio.

Are there penalties for early repayment?

Some lenders may charge prepayment penalties if you pay off a personal loan early—usually within the first few years of the loan. Personal lines of credit typically do not have prepayment penalties.

Can I switch from one to the other over time?  

No, you cannot switch from a personal loan to a personal line of credit or vice versa. These are different financial products with their own applications and approval processes. If your needs change, you’ll need to apply for a new product separately.