If you earn your own money, you may know how difficult it is to make financial arrangements for big-ticket purchases such as a car or a house. You may also be required to hold finances for a longer period of time to execute a project, or for making year-on-year payments or require capital for an event. Whatever your requirements may be, consumer loans and lines of credit will be your go-to resources for fulfilling these financial needs.
A line of credit can also be seen as an unsecured personal credit with a revolving credit account. This means that the account is handy and you may borrow funds from it as and when required, without taking the lump-sum amount. Lines of credit are perfect for consumers with irregular income streams and to make payments of variable costs.
It is because of the flexibility that comes along with a line of credit that the demand for unsecured credits has increased over the years, as can be seen in the graph below.
Source: TransUnion
Depending on your situation, consumer loans and lines of credit will help you accomplish your goals and make arrangements for your finances.
What Is The Difference Between Consumer Loans And Lines Of Credit?
Flexibility
You can easily find personal loans that will help you meet your financial requirements by simply allowing you to borrow a fixed amount of money which is repaid over time with interest. Personal loans have a short-moderate repayment period with quick disbursements. Lines of credit on the other hand is also called a bank-line where you directly open with a bank or credit union and lets you borrow money when you need it, up to a preset borrowing limit. With a line of credit, you only pay the interest on the amount you borrow till your funds are exhausted. In other words, you can use a personal line of credit pretty much the same way you use a credit card.
Interest Rates
Personal loans are also commonly known as signature loans. This is because you can receive the amount in your account by just being qualified for the loan and by signing the documents. Personal loans work the same irrespective of it being a debt consolidation loan or any other type of borrowing. In most cases where personal loans are unsecured, you are not required to provide collateral. However, if you secure your line of credit with an asset, you may receive a better interest rate. The interest rates on lines of credit are much lower than credit cards rates especially if you have a good credit score. Moreover, the interest rates accrue only when the funds are accessed.
Repayments
A loan requires you to pay the same amount, or installment, every month for the life of the loan. With a credit line, you can pay back what you owe in payments of any amount above a specified monthly minimum, or you can pay back what’s owed in a few large payments with relatively little interest. Consumer loans and lines of credit when compared to each other reflect similar benefits. However, they are very different.
There are three ways in which you can repay to your line of credit:
Balloon Payment: A personal line of credit, through this method will require payment of the entire balance at the end of the term, otherwise known as a balloon payment. Balloon payments come with the added need to refinance if the borrower is unable to repay the full amount. This means you can borrow more if your credit is exhausted and you are unable to make the payments.
Demand line of credit: In rare cases, banks may offer a “demand line of credit,” which functions similarly to a standard line of credit, but gives the lender the right to call the loan for repayment at any time.
Draw and repayment periods: In some instances, personal lines of credit can feature separate draw and repayment periods; allowing the borrower to withdraw funds during the draw period, while requiring them to make monthly payments during the repayment period.
Which Are Some Of The Best Lines Of Credit?
Keybank
KeyBank provides the narrowest range of rates on its standard unsecured credit line, ranging from 10.74% – 15.99%. However, unlike other regional banks, KeyBank isn’t widely accessible to all interested applicants.
Wells Fargo
Wells Fargo offers the highest borrowing caps on both secured and unsecured lines of credit at $250,000 and $100,000 respectively. Applicants may have difficulty securing a competitive interest rate without a good credit score or collateral. For borrowers with credit issues, we recommend checking with smaller regional banks like KeyBank or Regions Bank, as they have comparable rates to Wells Fargo but cater to a wider credit spectrum. It
Pentagon Federal Credit Union (PenFed)
The interest rates on all credit union loans and lines of credit are capped at 17.99% APR, whereas many banks may charge up to 36%. The 14.65% rate on PenFed’s line of credit is higher than the average rate on most other lines, but it has the benefit of having a fixed rate, which is unusual.
Thank you for reading this blog on A Guide To Understand Consumer Loans And Lines Of Credit. If you are interested in learning more about student finances, the following articles should be of interest to you: 8 Coding Boot Camps That Defer Tuition.
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