Finding the right financial solution often comes down to choosing between the two most popular options, including a personal loan vs personal line of credit. While both offer ways to borrow money when you need it, they work in very different ways, and each has unique pros and cons depending on your situation.
We break down the differences between personal loans and personal lines of credit, how they work, when each makes the most sense, and what you need to qualify. By the end, you’ll be equipped to choose the right tool for your financial goals, whether it’s debt consolidation, home improvement, or covering an unexpected expense.
What Is a Personal Loan?
A personal loan is a lump-sum installment loan you borrow from a lender, such as a bank, credit union, or online platform. You agree to repay the borrowed amount in fixed monthly payments over a set repayment period. Loan terms typically range from two to seven years but can extend to 10 or 12.
Personal loans can be secured (backed by collateral) or unsecured (no collateral). Most are unsecured, meaning they rely heavily on your credit score and financial history to determine eligibility and interest rates.
You can use a personal loan for almost any purpose, including home improvement, medical bills, weddings, debt consolidation, and more. They’re especially useful when you need a large amount of money upfront and want predictable payments.
Key Features of Personal Loans
- You receive a fixed loan amount in one lump sum
- Payments are made monthly over a fixed term
- Usually come with fixed interest rates
- Often have lower APRs than credit cards or personal lines of credit
- Often include origination or administration fees
What Is a Personal Line of Credit?
A personal line of credit functions more like a credit card than a loan. It gives you access to a revolving credit line, meaning you can borrow up to your credit limit, repay, and then borrow again during your draw period.
Instead of receiving a lump sum, you only pay interest on the amount you borrow, not the full credit limit. Many lines of credit offer variable interest rates, which can change based on market conditions.
Credit lines are often used for ongoing or unpredictable expenses, like home repairs spread out over time or medical bills. Because of their flexibility, personal lines of credit are often kept open as a financial safety net.
Key Features of Personal Lines of Credit
- Borrow as needed up to your credit limit
- Interest accrues only on the amount used
- Payments may vary based on balance and rate
- Typically unsecured and require a strong credit history
- May include annual fees, maintenance charges, and higher APRs
Personal Loan vs. Personal Line of Credit: Quick Comparison
| Feature | Personal Loan | Personal Line of Credit |
| Funding | Lump sum | Withdraw as needed |
| Interest | Usually fixed | Usually variable |
| Repayment | Monthly payments over fixed term | Flexible, often interest-only during draw period |
| Best For | One-time expenses | Ongoing or unpredictable needs |
| Fees | Origination, administrative | Annual fee, cash advance, maintenance |
Expert Insight
“Understanding the difference between a personal loan and a line of credit can help with deciding which one is best suited for your situation.
Personal loans are installment loans and are generally more suited for one-time expenses or debt consolidation. They provide for a fixed rate and a fixed term allowing for better planning on the cash flow and budgeting of your expenses. Generally, they also provide for a more attractive interest rate.
Lines of credit are flexible funding sources that allow for flexibility with the amount withdrawn and timing. We generally recommend having a line of credit established for emergencies.” – Sharon Hayut of Magus Financial
Pros and Cons
Personal Loan Pros
- Lower, fixed interest rates than many other products
- Predictable payments make budgeting easier
- Often funded in as little as one business day
- Great for debt consolidation or major purchases
Personal Loan Cons
- You must qualify based on your credit score
- Taking the full loan amount upfront increases debt load
- Less flexibility once the loan is issued
Personal Line of Credit Pros
- Borrow as needed for variable expenses
- You only pay interest on what you use
- Funds can be reused during the draw period
- Helpful for irregular costs like ongoing home improvement projects
Personal Line of Credit Cons
- Variable interest rates can fluctuate and cost more
- Often includes annual fees or account maintenance charges
- Approval may require excellent credit
- Tempting to overspend due to revolving access
Which One Is Best for You?
Choosing between a personal loan and a personal line of credit depends on how much money you need, when, and how you plan to use it.
Choose a personal loan if:
- You need a set amount of cash upfront
- You’re consolidating multiple debts
- You prefer predictable payments and a fixed interest rate
- You’re planning a large one-time project, like a wedding or roof replacement
Choose a personal line of credit if:
- You want flexibility over how and when you borrow money
- You’re managing expenses that fluctuate
- You want to keep a backup source of funds for emergencies
- You’re comfortable with variable interest rates and managing revolving credit
What About Home Equity Loans and Lines of Credit?
If you’re a homeowner, another borrowing option worth considering is a home equity loan or a home equity line of credit (HELOC). A home equity loan allows you to borrow a lump sum against the value of your home. You can typically borrow up to 85% of your home’s equity, using your house as collateral.
Like personal loans, home equity loans have fixed interest rates and predictable monthly payments, making them ideal for one-time expenses like major renovations or large medical bills.
There are a couple of variations within home equity borrowing. A home equity loan is often referred to as a second mortgage because of its fixed repayment term and interest structure.
The most common variation, a HELOC functions more like a credit card, in which you’re approved for a maximum amount and can draw from it as needed over a set draw period, usually between five and 10 years, followed by a repayment period. HELOCs often come with variable interest rates, which can make budgeting trickier over time.
Although home equity loans and HELOCs differ from personal loans and lines of credit, they have striking similarities. The primary difference is that they’re backed by your home as collateral.
Because of that collateral, they tend to offer lower interest rates than unsecured options, but they also carry the risk of foreclosure if you can’t repay. These options are typically best for homeowners with solid equity and a specific plan for how the funds will be used. The best home equity lenders offer a wide range of solutions along these lines.
Related Article: Can I Use a Home Equity Loan to Pay Off Debt?
Do Personal Loans and Lines of Credit Affect My Credit Score?
Both personal loans and personal lines of credit can impact your credit score in several ways, starting from the application process.
Hard vs. Soft Credit Checks
When you apply for a loan or line of credit, the lender typically performs a hard credit check, also known as a hard inquiry. This allows them to review your full credit history to assess risk. A hard inquiry will cause a temporary dip in your credit score, usually by a few points. It also remains on your credit report for up to two years, though its effect on your score lessens over time.
In contrast, a soft credit check or soft inquiry, is a less invasive review of your credit. It occurs when you check your own credit score or when lenders perform a pre-qualification check. Soft inquiries don’t affect your credit score and are not visible to other lenders.
Most of the best personal loan providers perform a soft inquiry for prequalifying and a hard inquiry before officially approving your loan.
Credit Score Impact
Once you’re approved and accept the offer, the loan or line of credit becomes a new account on your credit report. From that point forward, your payment behavior matters. Making on-time payments and keeping balances low can strengthen your credit score over time.
However, late or missed payments, high credit utilization, or defaulting altogether can significantly hurt your score. These negative marks can also cause lenders to assign you a higher annual percentage rate on future credit products.
If you’re concerned about your credit, it’s a good idea to check if the lender offers a prequalification process using a soft check before formally applying.
What to Watch Out For
Consider the following aspects of borrowing before moving forward. Make sure the terms and fee amounts are acceptable to you and continue shopping around if not. Most importantly, know how they’ll affect your overall financial picture before committing.
- Fees: Application fees, annual fees, and late charges
- Loan terms: Compare repayment periods, interest rates, and penalties
- Your financial habits: Do you want regularity or flexibility?
- Interest accrual: Personal loans start accruing interest immediately, while credit lines accrue only when you draw funds
Personal Loan vs Personal Line of Credit: Bottom Line
When it comes to comparing a personal loan vs personal line of credit, there’s no one-size-fits-all answer. Both products can help bridge financial gaps, but the best choice depends on your needs, your discipline, and your goals.
Need a defined amount for a specific purpose like a home improvement? A personal loan might be the better pick. Prefer flexible access to cash for ongoing expenses? A line of credit offers the adaptability you’re looking for.
Either way, compare loans and personal lines side by side, ask about fees, and evaluate how the loan terms fit your life.
Which is the best personal loan provider?
Choosing the right personal loan provider is crucial for securing favorable terms and a smooth borrowing experience. Based on evaluations from Trusted Company Reviews, here are just a few of the best personal loan providers in no particular order.
Credible
Overview
Credible is a loan marketplace that allows borrowers to compare prequalified rates from multiple lenders without affecting their credit scores. The platform is known for offering some of the best APRs in the market, providing borrowers with competitive options.
Check your Rates at Credible.com
Features
- Access to a diverse selection of top-rated lenders, including Upstart, LendingClub, Discover, Upgrade, SoFi, and LightStream
- No fees for using the service
- Loan amounts ranging from $1,000 to $200,000
- Rates as low as 6.94% with autopay discount
LendingTree
Overview
LendingTree is an online lending marketplace connecting borrowers with a vast network of lenders. It offers access to over 300 lending partners, allowing consumers to shop and compare finance options without affecting their credit scores until they accept a loan offer.
Check your Rates at Lendingtree.com
Features
- Partners with over 500 lending companies
- Offers personal loans ranging from $1,000 to $50,000
- Loan terms between 12 to 144 months
- Prequalification with a soft credit check
Read the Full Lendingtree Review
LendingClub
Overview
LendingClub is a peer-to-peer lending platform offering personal loans suitable for various financial needs. From its Facebook beginnings, it’s evolved into a full-scale peer-to-peer lending company, highly rated by consumers and experts alike.
Check your Rates via Credible’s Site
Features
Loan amounts from $1,000 to $40,000
Repayment terms between 24 to 60 months
Requires a minimum credit score of 660
Read the Full LendingClub Review
Upstart
Overview
Upstart utilizes artificial intelligence to assess loan applicants, considering factors beyond traditional credit scores. The company’s rapid growth is a direct reflection of its innovative approach to lending.
Check your Rate via Credible’s Site
Features
Loan amounts from $1,000 to $40,000
Repayment terms of 36 or 60 months
Doesn’t publish a minimum required credit score
Upgrade
Overview
Upgrade is another lending marketplace platform, featuring multiple lenders. The site allows consumers to shop around for the best personal loan product for their needs without impacting their credit score. It provides a wide variety of loan options, with amounts ranging from $1,000 to $50,000.
Check your Rates at Upgrade.com
Features
Loan amounts from $5,000 to $100,000.
Repayment terms ranging from 24 to 144 months.
No origination, prepayment, or late fees.
Note: The information provided above is based on evaluations from Trusted Company Reviews and is accurate at the time of publishing. Loan terms, interest rates, and eligibility criteria are subject to change. It’s recommended to visit each lender’s official website for the most current information.
