What is the difference between Line of Credit vs Personal Loan?

Line of credit vs Loan - It's essential to understand the differences that may influence your financial strategy. Whether it's a planned home renovation or an unexpected medical bill, the choice between a Personal Loan and a line of credit can have significant implications for your fiscal health. Both options offer financial relief, but they come with different terms and flexibilities. This article sheds light on these two popular financial tools, helping you make an informed decision that suits your unique monetary needs.

Understanding Personal Loans vs. personal line of credit

Personal Loans and lines of credit are two incredibly useful instruments, each with its own unique advantages and applicable scenarios. A Personal Loan is a fixed amount of money lent to an individual by a bank or financial institution, typically used for specific purposes such as funding a significant purchase or covering wedding expenses. Once approved, the borrower receives a one-time lump sum, which is then repaid over a set period through fixed monthly instalments.

On the other hand, a line of credit is a flexible form of borrowing and operates more like a Credit Card. You get access to funds up to a predetermined credit limit approved by the lender, depending on your creditworthiness and the lender's policies. Instead of receiving the total sum upfront, you can draw money as needed, which offers tremendous flexibility. Interest is paid only on the amount utilised, not the entire credit limit. This makes the line of credit ideal for ongoing expenses such as home renovation projects or emergency funds.

Key factors that make Personal Loans and lines of credit distinct from one another

Here are some differences between a Personal Loan and a line of credit:

1) Nature of borrowing
A Personal Loan is a fixed sum given to you upon approval and is ideal for specific, one-off financial needs. It's a simple, straightforward financial agreement where you know exactly how much you have and what you need to repay. A line of credit, however, is a flexible credit facility up to a certain limit, much like a Credit Card, suitable for fluctuating financial demands and unforeseen expenses, offering ongoing access to funds.

2) Repayment structure
Repayments for a Personal Loan are on a fixed schedule with equal monthly payments over a predetermined period, typically ranging from 12 to 84 years with Axis Bank. This structure helps you plan your finances effectively. On the other hand, a line of credit offers a flexible repayment plan where the minimum payments may adjust based on the current balance, and you can even settle the full amount at any time, providing greater control over your debt.

3) Interest rates
The interest rate for a Personal Loan is usually fixed, giving you the comfort of a constant rate throughout the repayment period. This makes financial planning predictable. In contrast, a line of credit often comes with variable interest rates that can change with market conditions, meaning the cost of borrowing can increase or decrease over time, affecting your repayment amount.

4) Purpose of borrowing
Personal Loans are best when you know the exact amount you need, making them suitable for paying out lump-sum expenses like home renovations or a wedding. A line of credit is designed for ongoing or unexpected expenses, or for various needs over time, such as continuous home improvements or covering living expenses during a loss of income.

5) Fund distribution
Once a Personal Loan is approved, the full amount is deposited into your account, giving you a pool of funds to use as needed. Contrastingly, a line of credit allows you to withdraw money up to a certain limit at any time, which means you can use as much or as little as you need, providing a safety net that adapts to your spending habits and needs.

6) Term lengths
A Personal Loan comes with a predefined repayment period, setting a clear end date for when the loan will be paid off. This period can span several years, depending on the loan agreement.

Alternatively, a line of credit generally does not have a set repayment term, offering ongoing access as long as you meet the lender's terms, which could include periodic reviews of the credit line.

7) Funding method

For a Personal Loan, you receive the entire amount as a lump sum, enabling you to manage large expenses immediately. With a line of credit, you are granted a maximum borrowing limit and can draw funds as needed over time, which can be particularly useful for handling costs that occur in stages or to smooth out irregular income.

Pros & cons of Personal Loan & line of credit

Each borrowing option carries its unique set of benefits and drawbacks. While a Personal Loan offers the stability of fixed payments and interest rates, a line of credit provides flexibility and access to funds when you need them, albeit with the need for careful financial management due to variable interest rates and the potential for higher costs over time.

Personal Loan

Line of credit

Also Read: Instant loan without CIBIL: 3 tips to get Personal Loan without CIBIL score

Conclusion

At the financial crossroads of line of credit vs. Personal Loan, your choice pivots on your financial landscape.

Axis Bank’s Line of Credit is perfect for managing unpredictable expenses with minimal documentation and flexible repayment options. On the flip side, a Personal Loan caters to your larger, planned expenditures with loans up to ₹40 lakhs, extended tenure options up to 84 months, and competitive interest rates starting at 10.75% p.a. Both paths are designed to bolster your financial freedom, tailored to meet your specific needs with Axis Bank's trusted services.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.