Personal loan versus line of credit: Which should you choose?
Need the best interest rate? Want fixed payments or flexibility? Find out the differences between personal loans and lines of credits.
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Need the best interest rate? Want fixed payments or flexibility? Find out the differences between personal loans and lines of credits.
Life is full of big expenses. If you ever need a new car, have a home emergency or simply want to take a vacation, might consider getting credit to pay for it. Both personal loans and lines of credit are ways to borrow money for large spends, but there are some significant differences between the two types of credit. This article provides a roadmap to deciding which is best for your needs.
With a personal loan, you borrow a single (fixed) amount of money from a bank or other lender. In return, you agree to pay back the principal plus interest over a certain period of time. This is called “installment credit.” Often, personal loans are for specific expenses. For example, you might apply for a car loan to buy a vehicle, or a debt consolidation loan to reduce your debt. Personal loans can be secured with collateral or unsecured, and the amount you’re eligible to receive is tied to your credit history and financial picture.
When you’re approved for a line of credit, the bank, firm or lender extends a certain amount and you can borrow on an as-needed basis. Whatever you pay back, you can access the credit again, just like with a credit card. This is called “revolving credit.” You can use the money for any purpose you wish. Just like with loans, lines of credit can be secured or unsecured.
Here are the key differences at-a-glance.
Personal loan | Line of credit | |
Type of credit | Installment (non-revolving) | Revolving |
Payment schedule | A fixed amount over a fixed time period. | As-needed, with a minimum monthly payment if you borrow |
Interest rates | Fixed or variable | Usually variable, and tied to the Prime Rate (which is currently 6.45%.) |
Interest applicability | On the whole loan | Only on what you borrow |
Extra fees | Transaction or service fees | Transaction or service fees |
Uses | A need specified when applying | Any purpose, no need to reveal |
Here are the pros and cons for personal loans.
Here are the pros and cons for lines of credit.
The interest you pay on a personal loan or a line of credit will depend on many factors including the lender, your credit history, the terms of the credit and the prime rate (in the case of variable interest). That said, these are the variables you can negotiate to get the best rates.
For a personal loan:
For lines of credit:
Personal loans and lines of credit are both powerful financial tools, but how do you know when you should choose one over the other?
In general, a personal loan is better for one-time expenses like a vacation or the purchase of a car. They’re also more structured so may appeal if you need help managing your finances.
A line of credit can be used like a credit card, with similar positives and negatives, like flexibility, accessibility and more. It’s great if you foresee needing credit over time. For example, a line of credit would be far more useful for, say, a longer renovation project where you can withdraw and repay continually without having to refinance. But you could use it for anything really.
Here’s a breakdown of the best personal loans available in Canada right now.
Lender | Loan term | APR | Loan amount | Minimum credit score |
---|---|---|---|---|
Spring Financial | 6 to 60 months (5 years) | 0.8% to 46.99% | $500 to $35,000 | N/A |
Scotiabank | Up to 5 years | 6% to 10% | N/A | Undisclosed |
BMO | 1 to 5 years | 8.99% to 22.99% | $2,000 to $35,000 | Undisclosed |
TD Bank | 1 year minimum to 7 year maximum | 8.99% to 23.99% | $2,000 to $50,000 | 650 |
CIBC | 1 to 5 years | 9% to 10% | $3,000 to $200,00 (unsecured loan) | Undisclosed |
RBC | 1 to 5 years | 9% to 13% | N/A | Undisclosed |
Mogo | 6 to 60 months (5 years) | 9.90% to 46.96% | $500 to $35,000 | N/A |
Fig Financial | 24 to 60 months (5 years) | 12.99% to 31.99% | $2,000 to $30,000 | N/A |
MDG Financial | 36 months (3 years) | 29.78% to 44.80% | Up to $1,600 | Minimum of 560 |
Easyfinancial | 9 to 84 months (7 years) | 29.99% | $500 to $20,000 | N/A |
Here’s a quick guide to help you decide. It lists the most common types of debt Canadians carry, according to the most recent data from Statistics Canada, as well as the most popular large purchases Canadians plan for 2024, according to an Affirm poll. But, as with every financial decision you make, you need to use what you read as a starting point and figure out what makes the most sense for you and your personal situation.
Type of debt | Personal loan | Line of credit |
---|---|---|
Credit card debt | X | |
School debt | X | |
Vehicles | X | |
Other bills | X | X |
Vacations | X | |
Furniture and decor | X | |
Technology | X | |
Concert tickets or other experiences | X |
So, which will you choose, a line of credit or loan?
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Great article! Good reminder of options and strategies for various financial needs. Negotiating financing especially for a car is always a challenging experience and the information you provided on lines of credit versus loans was very valuable too.
Thank you!
Linda C.