Many people are under the mistaken impression that a line of credit is the same as a standard loan. However, that's not true. They are two distinct ways you can borrow money for yourself or your company.
Standard Loans – These involve the typical loans - auto loans, mortgages, personal loans and student loans
Line of Credit – large sum of money that’s extended to you for a period of time via a sporadic steady installment. These are typically seen with businesses or home equity. The funds of a line of credit can be used over and over after money has been paid back. While some lines of credit have an end date, most don’t.
There are a plethora of basic differences between the two. Your standard loan covers high-ticket products such as car and houses. They tend to be secured against the asset. With a line of credit, you have high-interest rates and make reduced minimum payment amounts. The impact on the credit report and scores is immediate.
On top of that, the closing cost for lines of credit loans are much higher.
There are two key differences between the two methods:
When a lender approves you for a loan, you get the whole amount immediately, and the interest on the money starts building. When you’re approved for a line of credit, you can borrow to a certain amount immediately but don’t get any money. The interest builds up when you’ve made a purchase with the credit line.
Many lenders want to know what your purpose for the loan is. For instance, you want a college degree, so you’re provided with a student loan. You want to buy a home, which means the bank provides you with a mortgage. There is no reason for lines of credit. You can make any kind of purchase you want with it, and you don’t need a lender’s approval.
When it comes to loans and lines of credit, it’s much easier to borrow on a line of credit. Payments are often more flexible since the purchase dates and amounts vary. The uncertainty that comes with a line of credit means a higher interest rate. It’s almost impossible to attain an unsecured line of credit for a considerable amount.
How do they differ from credit cards then? While they act similar to each other, they’re not the same. Lines of credit are securable with tangible assets – home, car, etc. Credit cards come with a minimum monthly amount that’s based on the balances of the card. Lines of credit don’t always have requirements for monthly payments.
Some people will use a personal installment loan to pay their lines of credit off to boost their credit score. By doing this, you can really improve your credit file.