A loan and a line of credit are two different types of credit that individuals and businesses can access from banks and financial institutions.
A loan is a bulk amount that can be borrowed in a lump sum to which the borrower has access until it has been used up.
On the other hand, a line of credit has a set credit limit that is available to the borrower. Once the limit has been used, the borrower can re-use the amount once again, given they pay it off.
Loans and lines of credit are suitable for different types of payments. While the former is more suited to making a big purchase, such as a house, vehicle, or to fund one’s education, a line of credit is more suited to make smaller but recurring investments.
Read on to find out extensive details about the two types of credit and the difference between them.
Loan Vs. line of credit – The highlights
Here is everything you need to know about the differences between a loan and a line of credit.
| Loan | Line of credit |
| It is disbursed as a lump sum all at once. | This is reusable, where the borrowed amount can be used up, paid back, and used again indefinitely. |
| Interest rate is fixed or variable, but mostly fixed. | Interest rate is variable. |
| The amount borrowed is usually large. ivomec ivermectin for dogs | Amount borrowed is smaller. |
| Interest is levied on the whole amount as soon as it is borrowed. | Interest starts accumulating only on the amount accessed and not on the whole sum borrowed. |
| Rates of interest are usually lower but use is less flexible (except personal loans). | Rates of interest are usually higher but use is more flexible. |
What is a loan?
When we generally talk about a loan, we mean an installment loan. An installment loan is a non-revolving type of credit, i.e. a lump sum of money is lent to you that you are supposed to pay back within a certain amount of time.
It is meant for single-use, which means that once the credit has been used up, the loan term ends. If you need more money, you will have to borrow another loan.
A loan is paid back in installments over a stipulated time. Usually, the repayment frequency is every month, called equated monthly installments or EMIs.
But if you can negotiate with your lender for an alternate installment mode, such as quarterly installment, that is also accepted. You pay back both the amount and the interest levied on the amount until the entire due has been paid off.
Secured and Unsecured Loans
Loans are ideally classified into two types: secured loans and unsecured loans. With secured loans, you are required to pledge an asset against which the loan will be granted to you.
An asset is an object of sufficient market value on which the lender can lay claims if you fail to repay the loan. Usually, the collateral is the same object for which the loan is being advanced.
For example, for an auto loan, the motor vehicle to purchase which you are borrowing the loan will serve as the collateral that can be seized if you default on the loan. Certain loans can only be availed of if you have a fixed deposit account or a savings account in a particular bank. These accounts are nothing but collateral, against which the banks disburse the loans.
An unsecured loan is defined as a type of loan where no collateral is needed to borrow the loan. When lending you an amount without collateral, the borrower becomes an entity that accrues sufficient risk. Therefore to compensate for potential risk, the lender usually charges high-interest rates on an unsecured loan compared to secured loans. Most types of personal loans in existence are unsecured loans.
Money View is one of the most notable financial organizations in the country which offers unsecured personal loans at competitive interest rates.
You can avail the personal loan after meeting the eligibility criteria that involves hassle-free online documentation. These personal loans are quite attractive as they don’t require very high credit scores and are disbursed within the span of a day once you have checked in all the boxes.
Examples and types of loans
There are multiple types of secured and unsecured loans. Some of the most common examples of loans are given below.
Mortgage loan
A mortgage is defined as a specific type of loan used to purchase a property. It is a secured loan taken against the real estate in question. To qualify for obtaining the loan, you have to meet specific eligibility criteria and conditions set by the borrower. Since this is a secured type of loan, lower interest rates are charged on them.
Auto loan
An auto loan is availed to invest in a motor vehicle, such as a car, motorcycle, etc. It is also a secured kind of loan backed by the automobile that the borrower wishes to purchase.
If the individual fails to repay the total amount within the stipulated time, the lender can repossess the vehicle and pursue the borrower for any outstanding amount. did ivermectin make my dog go blind
Debt consolidation loan
A debt consolidation loan is typically taken to pay off the outstanding amounts collected from multiple loans. Instead of feeling pressured to keep up the repayment of multiple loans, the debt consolidation loan can be utilized to pay off the outstanding balance of all loans.
As a result, the borrower is required to repay the amount of the single loan only. A debt consolidation loan is usually an unsecured type of loan.
Student/ educational loan
It is a type of loan that can be used to fund one’s educational expenses over a period of time. Student loans come with variable interest rates and are usually dependent on the student’s academic qualifications, income and creditworthiness of the parents, and so on.
What is a line of credit?
Unlike a loan, a line of credit is a revolving type of credit. This means that a certain sum of money is advanced to you that you can use up to make purchases.
Once you pay back the amount used up, you can avail of the credit once again, as long as you pay it back again. Therefore the credit is available to you in a revolving fashion that you can use as long as the balance has been paid off and there is credit left to be used.
For example, a credit card is a personal line of credit. A line of credit works in the following manner: If you have a credit line with INR 10,000 as the credit limit, you can use the total amount or a part of the amount instantly or over a period of time. If you use up INR 5,000, you will still retain INR 5,000 for use. If you pay back INR 5000, you will have the total amount of INR 10,000 for subsequent use.
A significant difference between a line of credit and a loan is that with the former, interest starts accumulating only once you use the amount.
You might have borrowed the credit line on an earlier date, but the interest will be charged only once you make use of the money. As opposed to that, interest starts accumulating on loan as soon as the amount is borrowed.
Types of lines of credit
The following are the lines of credit in existence.
Personal line of credit
A personal line of credit is an unsecured line of credit. Because it does not require security, the individual must have a good credit score to be eligible to borrow this credit.
Consequently, personal credit lines charge high interest rates and have lower credit limits, and can usually be used indefinitely by the borrower depending on the lender’s conditions.
Business line of credit
Business lines of credit are advanced to business. Depending on the market value and profitability of the business, these types of credit can either be secured or unsecured, with low-interest rates or high-interest rates. why does ivomec have a longer shelf life than generic ivermectin
Businesses take lines of credit to make essential purchases as and when required, which can be later paid off from the proceeds.
Home equity line of credit (HELOC)
These are credit lines secured by your home’s market value. Because this is a secured credit line, interest rates are usually lower than that on a personal line of credit.
Conclusion
Both these types of credit have their own target consumers, flexibility, conditions and utilities. No matter which one you opt for, make sure to use credit carefully.
Never use credit recklessly and settle for a loan/line of credit plan best suited to your financial and professional situation.
