Individuals borrow money from financial institutions for various purposes and the two common methods used by people to obtain credit money are line of credit and loan. A line of credit and loan are forms of borrowing money from different financial institutions that are registered as lenders for personal use or some form of business. However, though these two methods of borrowing money appear to be similar at a glance, a closer look shows that they are different in many aspects as explained in detail below.
Major characteristics of a loan
A personal loan is often applied for specifically for a purpose and this should be approved by the lender. Some of the reasons why people apply for loans at http://finance.yahoo.com/news/announcing-offer-2500-installment-loans-052900775.htmlinclude the need to purchase homes or vehicles and in some cases the applicants may be in need of student loans to cover funding for their educational requirements. When you apply for a loan, you are entitled to get the money as lump sum once the loan application has been approved. The period for approval of the loan differs but it can take some days.
The other notable characteristic of a loan is that the interest rate is either fixed or variable and the loan is repaid over a certain period of time and this is also fixed. This can be on a monthly basis but the loan is expected to be repaid in full upon expiry of the agreed duration of repayment. Failure to do so may attract more charges and this negatively impacts on the borrower’s credit history. When your credit history has been tainted, you may not be able to easily get another loan in future since the lenders are very particular about it.
Key features of a line of credit
On the other hand, a line of credit is another credit facility that enables the borrowers to get funding from the lender on an ongoing basis for the amount that has been approved. The approval for this type of credit is faster and the borrowers are eligible to access varying sums of money once their applications have been approved. For instance, when the cap for your credit line has been pegged at $5 000, this means that you can borrow any amount of money within this range but should also make sure that you repay it within the agreed period of time. A line of credit functions like a credit card though they are different.
The other notable aspect about a line of credit is that it has no specific purpose and can be used over a short space of time. A line of credit is not secured like a loan and it can be observed that the repayment plan for funds finance borrowed using a line of credit is flexible. The interest rate charged on a line of credit is variable and is only paid on the money that has been used. The other issue is that the rate of interest charged on a line of credit is higher than that of personal loans by virtue of the fact that the former is not secured by any form of collateral.