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Personal Loans vs. Lines of Credit

What's the Difference?

If you're like some two-thirds of Americans who have little or no savings, you're going to need a personal loan or line of credit for cash for time-sensitive purchases or emergencies at some point.

These are the two popular options for people who need unsecured funds quickly, provided they have a reliable income and decent credit score.

While personal loans and lines of credit are very similar and may be used to pay for the same things, they have a few key differences that can help you determine the best way to go for your budget.

Their usefulness varies based on the purpose. Each has its own advantages by design. So, let's take a look at the subtle differences that could guide your choice.

The Basics of Personal Loans and Lines of Credit

The first question to ask yourself is how much money you need. The big differentiator between personal loans and lines of credit is distribution.

Personal loans are released in one lump sum that you begin accruing interest on immediately. A line of credit, much like a card, gives you a set amount to draw from as you need it.

So, it comes down to your needs. If you know exactly how much you need, personal loans may work best. If you are using the cash for an uncertain amount(s), the line of credit may be your best option.

Lines of Credit Are Flexiblecouple

Credit is flexible in two ways. First, you can take out what you need as you need it and you only pay interest on what's been borrow. Second, they carry variable rates that make for fluctuating payments that aren't necessarily ideal for tight budgets.

But, because personal loans come with lump sums, they may not work best for ongoing expenses like home improvement projects or wedding plans.

Personal Loans Are Predictable

Many personal loans come with a non-variable annual percentage rate that allows the borrower to know his or her monthly payment and plan their budget accordingly.

If, for example, you need the cash for an unexpected expense like a car repair, major appliance replacement or a pet emergency, then getting that particular amount and predictable payment is a good way to handle it.

Lines of Credit Make Good Safety Nets

You can get these anytime and have the money at the ready whenever it's needed. It can sit there untouched for years, but you won't be paying interest.

Many people tend to use lines of credit as safety nets for unplanned costs or as overdraft protection for checking accounts.

Personal Loans Can Clean Up Credit Messes

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If you've opened too many "safety nets" and fallen on them a few too many times, a personal loan is a great way to tidy up your finances.

A low, fixed rate can transform numerous high-balance statements, due dates and payments, into one bill you can easily -- and predictably -- take care of.

We all need cash we don't have from time to time. Talk with someone at your credit union or bank for help making the best decision or you can apply online for a personal loan or line of credit now to get the process started now.

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