Personal Loan vs Line of Credit: How to Choose?

Living in Canada can provide you with perks, but sometimes it gets very difficult to manage your finances. Want to buy something big or thinking of renovating your house, but have a shortage of money? You may have two options i.e. personal loan and line of credit. Are you confused, about which one to choose? And what is better for your situation? Read the article to know more about them. 

What is a personal loan?

If any unexpected big expenses happen like a car repair, or you need a big appliance. Then you have to apply for a personal loan. Where you get a lump sum amount, and then pay back the debt in fixed monthly installments. So if your financial habits and situation allow you to have one-time set expenses, then you should prefer a personal loan. 

Types of Personal Loan 

A personal loan has many forms, that you can get to fulfill your goals and necessities. There are many different categories of Personal Loans, but the main 2 types are:

• Debt consolidation loan: This is a type of loan that lets you pay off your existing loan. So you can easily pay higher interest rate loans and now convert to low interest rate loans. Like paying off your credit card balance, you can save some money by converting your huge debt into one loan payment.

• Secured loans: Secured loans require collaterals for lending money from the lenders. These loans are less preferable by customers, but they offer lower interest rates.

• Unsecured loans: An unsecured loan or signature loan doesn’t need collateral like a house or car. But they are given based on your creditworthiness.

Qualification Criteria

If you live in Canada, then you must have passed the following prerequisite to apply for a personal loan in any bank or company. 

• Proof of residency: you must be a Canadian citizen, and you have an original ID to prove your identity. 
• Minimum Age required: if you are 18+, then you are eligible to apply for a loan. As it is the age of majority in that area. 
• Minimum income: show your proof of income, like an income statement or payslip. Most of the lenders require a minimum income starting from $35000 to $50000. 

Pros and Cons of Personal Loan 

 Pros

• Funding you to afford big expenses 
• Fixed repayment period and interest rate.

Cons

• High interest rate, some creditors charge you additional fees too, like loan fees.
• Late repayment will hurt your credit report. 

What is a Line of Credit?

A line of credit is like a credit card or revolving credit that you can get from banks or credit unions. This is also known as a personal line of credit. If you are not clear on the exact amount of the loan, then a line of credit is the best choice. Because you have to pay the portion of credit, you used. Paying the minimum monthly payment will keep the line of credit in good health. 

Types of Line of Credit 

Line of credit has 5 main categories. 

• Personal line of credit: This line of credit doesn’t require any collateral. As this is an unsecured line of credit, so it has a high interest rate.

• Home equity line of credit: This line of credit requires your home as collateral. As this is a secured loan, it has a low interest rate. But there may be a chance of losing your house, in case of default.
• Business line of credit: A person who has started a new business can get this loan to expand the business. Apply for this loan and get your hands on ongoing funds.

• Demand line of credit: You immediately need a credit to run your business. Get it from a lender, but a lender can demand full repayment from you anytime.

• Securities-backed line of credit: This is a secured line of credit, in which you use your investment as collateral for nonpayments.

Qualification Criteria

The eligibility criteria for applying for a line of credit in Canada are similar to that of a personal loan. 

• Citizenship: you must be a Canadian citizen and have original ID to prove your identity. 
• Age criteria: if you are 18+, then you are eligible to apply for a loan. As it is the age of majority in that area. 
• Minimum income required: show your proof of income, like an income statement or payslip. Most of the lenders require a minimum income starting from $35000 to $50000. 

Pros and Cons of Line of Credit  

 Pros

• Get as much money as you need. Pay the interest on what you use. 
• Lower interest rate than Personal loan

Cons

• Interest rates are variable and can increase the repayment amount. 
• Overspending Will disturb your finances. 
• You have to pay more in interest because of making minimum payments on large balances. 

What are the similarities and differences between Personal loans and Line of credit?

Both personal loans and Lines of credit are used to get loans/debt from the lenders, but they work differently. 

Similarities 

There are some similarities in both of them. Like

• Eligibility criteria: Personal Loan and Line of Credit both strictly follow the qualification rules. Canadian resident and age must be 18+ 

• Credit Check: before providing you with the loan, lenders will apply a hard inquiry on your credit report. To confirm that you are in a position to pay back the loan. This happens for both Personal loans and Lines of credit. 
• Interest on borrowed amount: interest rate is applied on both personal loans and lines of credit. Because creditors want to earn money by lending it to you and in return also apply a fixed or variable interest on it. 

Differences

The major difference between a Personal Loan and a Line of credit is a personal Loan has a fixed repayment period and fee. That starts from 3 months to 7 years. It includes the borrowed amount, interest, and principal. So it has a fixed interest rate. You can get a whole amount, so you can use it for wedding or debt consolidation loans. 

While in Line of Credit, you have to pay back what you borrowed along with interest. So it has a variable interest rate. You can get, what you need. So use it for home renovation or unexpected bills. 

Which one to choose; Personal Loan or Line of credit? 

You may need money, but you are confused about these two loan methods. There are some factors that you consider while applying for a loan. 

Interest rate: Personal Loans may have a fixed interest rate throughout the repayment period, but you have to pay higher interest as compared to a Line of credit. In the case of a Line of Credit, the interest rate is applied on withdrawn credit only. While a Personal loan applies to interest on the full loan amount.