So you’re looking for the best way to cover a large purchase? But you aren’t sure how to compare a personal loan vs. line of credit?
When it comes to choosing the right debt product for your needs, it’s important to compare options. But, even more important, you need to know how to compare your options.
We have you covered with everything you need to know about personal loans and lines of credit.
A personal loan involves borrowing a certain amount of money from a bank or alternative lender. In return for borrowing the funds, the borrower agrees to repay the loan in installments. Each payment includes both the principal amount as well as the interest portion. The amount of money that goes towards interest will depend on the interest rate and the loan term.
Personal loans are typically unsecured, which means there is no collateral used to back up the loan. Unsecured loans tend to be riskier for lenders, and as such, they usually come with higher interest rates compared to secured loans.
The amount of money that you are able to borrow will depend largely on your credit score, payment history, income, and debt load. In general, lenders offer personal loans between $500 to $35,000, however, some lenders may offer higher amounts.
The interest rate you are charged will also depend on your financial and credit profile. The lower your credit score and the higher your debt-to-income ratio, the higher you can expect your interest rate to be. It’s best to check your credit score by pulling your credit report before applying for a personal loan. This will help you get a better idea of how easy or difficult it may be to get approved for a personal loan. As well as what type of interest rate you can expect.
There are several different uses for personal loans and a popular one among Canadians is to pay off high-interest credit card debt. According to TransUnion, credit card debt averages around $4,179 and accounts for around 5.3% of total outstanding debt. When you factor in the sky-high interest rates that credit card issuers typically charge. Usually anywhere between 19.99% to 29.99% or more. These rates can make it extremely difficult to pay it all off.
Many borrowers will take out a personal loan in order to pay off their credit card debt at a much lower interest rate, which can not only save them plenty of money over time but make monthly payments more affordable.
Debt consolidation involves taking out a new, larger loan to pay off several smaller loans, usually at a much lower interest rate. Rather than paying a number of debts at varying times of the month and at different interest rates. Borrowers can use the money from a personal loan to replace all that, making it much easier to manage. That said, it only makes sense to take out a personal loan to consolidate debt if the interest rate is much lower than all current loans.
A line of credit involves borrowing a certain amount of money from a creditor. Unlike a personal loan, the funds with a line of credit do not have to be withdrawn in one lump sum. Borrowers can take out as much or as little money as needed up to the specified credit limit. Only the money withdrawn is charged interest rather than the entire credit limit. Once that money is repaid, no further interest will be charged until the next withdrawal.
A personal line of credit differs from a traditional loan in many ways, including how you repay what you borrow.
With a personal loan, you would be required to make regular payments on pre-scheduled dates until the full loan is paid back by its due date. But with a personal line of credit, the repayments are more flexible.
The following are the more common types of repayments on a personal line of credit:
When you apply for a line of credit, you’ll be given a specific period within which you can withdraw money, which is referred to as the “draw period.” During this time, you’re only obligated to pay the interest portion of your payments. If you carry an outstanding balance by the time the draw period ends, you’ll enter a repayment period.
During this period, you cannot make any more withdrawals and you’ll have to make monthly installments to repay any remaining balance. The specific terms of repayment may vary by lender.
With this type of repayment arrangement, the full balance must be repaid at the end of the draw period.
A less common way to repay a line of credit is through a demand line of credit. With this repayment plan, the lender has the right to require full repayment at any time.
While personal loans are quite popular, a line of credit can be beneficial for a number of reasons.
While there are plenty of perks associated with lines of credit, they may not be appropriate for certain situations.
You can apply for a personal line of credit or a personal loan from a variety of sources, including banks, credit unions, and alternative online lenders.
Banks. The lending criteria for a personal line of credit and personal loan at a bank may be more stringent compared to other lenders. Generally speaking, you’ll need good credit and sufficient income to get approved by a bank for a personal line of credit or personal loan.
Credit unions. You may be able to secure a lower interest rate on your line of credit or personal loan with a credit union compared to a bank, but you will need to apply to become a member before applying for the loan.
Alternative online lenders. If you don’t meet the criteria for loans with a bank or credit union, you may have better luck with an alternative lender. These lenders offer financial products like personal lines of credit and personal loans to all sorts of borrowers, including those with bad credit. However, you will likely be charged a higher interest rate.
There are several differences between personal loans and personal lines of credit, as outlined in the following chart:
| Personal Loan | Line of Credit | |
| Disbursement Method | Lump sum payment | Reusable; any portion can be accessed at any time |
| Secured or Unsecured | May be either secured or unsecured | May be either secured or unsecured |
| Interest Rate | Fixed or variable | Variable |
| Loan Amount | Varies by lender (average amounts vary between $500 – $35,000) | Minimum $3,000 -$5,000 |
| Repayment | Installment payment schedule: Weekly Bi-weekly Semi-monthly Monthly payments | Pay interest only on the amount you use during the draw period. Interest and principal must be repaid by end of the repayment term. |
The exact way to apply for a personal line of credit depends on the lender you ultimately work with. The following chart describes how to apply with each of the 5 Big Banks in Canada:
| Line Of Credit TD | Apply online Book an appointment in person at a branch Call TD at 1-866-222-3456 |
| Line Of Credit Scotiabank | Apply online Book an appointment in person at a CIBC branch Call Scotiabank at 1-888-882-8958 |
| Line Of Credit BMO | Book an appointment to speak with a specialist at a BMO branch |
| Line Of Credit RBC | Book an appointment in person at a branch Call RBC at 1-800-769-2511 |
| Line Of Credit CIBC | Apply online Book an appointment in person at a CIBC branch Call CIBC at 1-866-525-8622 |
Both a personal loan and a line of credit can provide you with access to the money needed to cover a variety of expenses. But which one is best for you?
A personal loan makes sense if you know exactly how much you need to cover a specific expense.
For instance, if you need to borrow $15,000 for a home renovation, then consider opting for a $15,000 personal loan. But if you’re not sure exactly how much you’ll need, a personal line of credit might make more sense.
A personal line of credit is handy to have when a financial need arises at any time, so it’s always available, even on short notice. There’s no need to re-apply for a loan every time an expense pops up.
You may find a line of credit more suitable for you if you like the flexibility of being able to withdraw funds of varying amounts.
A personal loan and a line of credit are great tools to take advantage of to gain access to much-needed cash. But the decision you make between one or the other will depend on your specific circumstances, namely your finances and what you need the money for.
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Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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