Businesses and individuals may borrow via loans and LOCs. Non-revolving credit limits indicate the borrower may only use the money once and then pay off the loan with principal and interest.
A credit line is different. The borrower gets a credit limit, like a credit card, and makes monthly principal and interest payments. However, the borrower may repeatedly access a line of credit, unlike a loan.
Comparison Between Line of Credit And Loan
|Line of Credit
|How it works
|A line of credit is a predetermined maximum borrowing amount that may be drawn upon at any moment, repaid, and then used again to borrow money.
|Only once, in a single sum, does the borrower have access to the whole loan amount.
|When to use
|Any use imaginable may be made of available credit lines.
|The reason for taking out the loan, whether it be to purchase a residence or a car, is the major component that decides the terms and conditions of the loan.
|The interest rates attached to credit lines are often greater than those attached to loans.
|The closing expenses, if any, associated with loans are often more expensive than those associated with lines of credit.
|Only when money is withdrawn does interest begin to accumulate.
|Immediately, interest will be added to the whole amount that was borrowed.
Major Difference Between Line Of Credit And Loan
What Exactly Is Line of Credit?
A credit line isn’t a loan. When a borrower is accepted for a line of credit, the bank or financial institution gives them a specific credit limit they may use repeatedly.
It’s rotating. Thus it’s a flexible borrowing instrument. Credit lines may be used for ordinary shopping, vacations, modest improvements, or paying off high-interest debt.
Credit lines feature higher rates, lesser quantities, and smaller minimum payments than loans. Principal and interest are due monthly.
Key Difference: Line of Credit
- The interest paid on a credit card is often greater than the interest paid on a loan.
- Although interest is only accrued on the amount that is actually used, there may be a minimum charge that must be paid on the amount that remains unused in the account.
- If the maximum amount is not surpassed, further funds will become accessible in proportion to the amount of money that is returned.
- On the other hand, credit is often given out monthly instead of yearly, as with loans.
- This is done to provide the client with the ability to continue making use of the credit facility whenever it is required.
What exactly is loan?
Loan amounts depend on the borrower’s needs and creditworthiness. A loan is a one-time lump payment.
Therefore it can’t be used repeatedly like a credit card—secured or unsecured loan. Secured loans are secured by collateral, usually the loan’s asset.
For example, the automobile secures a car loan. If the borrower fails, the lender may repossess and sell the automobile to pay off the debt. The lender may pursue the borrower for any remaining balance.
Key Difference: Loan
- The duration of the transaction has already been decided upon.
- The transaction has been completed when all of the capital has been repaid. This may be accomplished by the payments being made in installments once a month or once every three months.
- There is no chance of gaining access to more funds until a new loan is established. This is the case even if the installments are paid.
- When you borrow money, you will be charged interest on top of the entire amount.
- The repayment period for loans is often measured in years.
Contrast Between Line of Credit And Loan
- Line of Credit- A credit line is not the same thing as a loan. Suppose a borrower is approved for a line of credit at a bank or other financial institution.
In that case, that institution will provide the borrower with a credit limit that they can use repeatedly. Because it rotates, it is a flexible tool for borrowing money.
- Loan- Because a loan is a one-time payment in its entirety, one cannot use it again the way one would use a credit card.
When should they be used:
- Line of Credit- You are unsure about how much money you need and the number of drawings you must participate in.
- Loan- Particular acquisitions for which you do not want to provide collateral. Or when you can consolidate loans with higher interest rates.
- Line of Credit- Credit, on the other hand, is often given out every month instead of yearly, as is the case with loans.
- Loan- Before a new loan is made, access to further funding is impossible. Irrespective of whether or not the payments have been made, this is a fact.
- Line of Credit- It’s possible that the interest rate on withdrawals will be greater than the one on loan itself. Recurring charges may be a possibility for certain accounts.
- Loan- If you don’t have strong credit, it isn’t easy to qualify—possible upfront costs to get started. A loan could have a smaller maximum lending amount than a commercial loan.
- Line of Credit- Although interest is only accumulated on the amount that is actually utilized, there may be a minimum fee that must be paid on the amount that stays unused in the account. This charge may be paid on the unused amount in the account.
- Loan- The transaction is finished when all of the capital has been repaid by making the payments in installments regularly, such as once a month or once every three months.
- Line of Credit- The opportunity to get financial assistance whenever it is required. You won’t have to worry about paying interest until you really use the money. Borrow money several times without having to reapply for it each time.
- Loan- Loans are easy to be approved if you apply online. Those with strong credit are eligible for favorable interest rates and minimal fees overall. It’s possible that being approved for this will be simpler than for a company loan.
Frequently Asked Questions (FAQs)
Q1. What is meant by a secured loan?
Because of their minimal risk, secured loans often have lower interest rates. Keeping up with payments is easier for borrowers since they don’t want to give up the security that they have put up as collateral.
A lender may keep most of the collateral even if a borrower defaults on a loan.
Q2. What is meant by the term unsecured loan?
There is no security for an unsecured loan. In most circumstances, a borrower’s credit history is the only factor determining their eligibility for these loans.
A higher interest rate is applied to unsecured loans since the lender has no way to make up for their losses if the borrower fails to repay the loan. Because of this, they often involve lower monetary amounts.
Q3. What is the meaning of a fixed interest rate?
You know exactly how much money you’ll pay each month if you have a fixed interest rate.
When your loan application is accepted, you’ll be given the interest rate you’re eligible for, which won’t change. If you’re looking for a level of assurance, a fixed rate may be the best option for you.
Q4. What is the variable interest rate in a loan or a line of credit?
The fact that variable rates often begin at lower levels than fixed rates do for the same kind of account is one reason why variable rates might be enticing.
On the other hand, the rate might go up or down in the future, indicating that your monthly payment amount could go up.
Q5. Is there any drawback to the credit lines?
Despite the fact that lines of credit may be used several times like credit cards, they often have higher interest rates and lower maximum credit limits than credit cards. On the other hand, revolving credit may be utilized several times.
Q6. Is there a difference between a credit card and a loan?
Due to the fact that a loan is not a revolving line of credit, it is impossible to utilize a loan in the same way that one would use a credit card.
In other words, one cannot use a loan in the same way that one would use a credit card. Because the amount that was given to you is a lump sum that can only be used once, you will not be able to utilize the credit that was supplied to you more than once.
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