A personal line of credit is a revolving credit that works more or less like a credit card. One can compare a personal line of credit with personal loans which are often called conventional lending as both serve the same purpose but the way they function are quite different. Both kinds of credits are multipurpose and can help you to fight financial crises. Though there are some similarities, there are some differences too which often creates confusion among the borrowers. Let’s learn both the credit products so that the decision making becomes easier.
What is Conventional Loans?
conventional loans are term loans. Such types of loans are multipurpose loans which make you use it for any purpose. The interest is calculated in a compounded way and the repayment of the loan happens in EMIs till the end of tenure. A conventional personal loan is applied by filling the form manually by visiting the branch office of the lender.
What is a Personal Line of Credit?
A personal line of credit is revolving credit. This is an online loan where the lender grants you a particular amount which you can withdraw in many small parts. There are no limits on the number of withdrawals you can have on your line of credit. A personal line of credit can be used for any purpose. The repayment of the same does not happen in EMIs. There is much flexibility in repayment of the loan. Once you pay it off, the funds go back to your credit limit and can use the same limit again and over.
Online Lending Vs conventional Lending: Which is better?
Both the lending options have their pros and cons. Here we have bought a comparison between both the loan instruments on different aspects of the lending.
The interest on the loan is the first concern of every borrower. The interest rate on a personal line of credit is always lower than a personal loan. The interest on a personal line of credit accumulates only on the amount which you have withdrawn. Moreover one can reduce the interest outgo by paying the loan sooner. On the other hand, one has to pay the prefixed interest on a conventional personal loan.
Both the personal loans and lines of credit are collateral free loans. But in the cases of low credit score, low income or high FOIR, the conventional lending institution may ask for a grantor of the loan or to secure the loan with collateral. But such scenarios will never occur in the case of a line of credit. A personal line of credit is a collateral free loan.
The Sense of Security
A personal line of credit gives you a sense of security. Once you avail a personal line of credit, you will always have some balance in your line of credit. A personal line of credit comes with a lifetime validity hence you can reuse the same limit for a number of times. But a personal loan is a one-time use product. Once the loan is disbursed and used up, you will need to apply for a fresh loan if you need some extra amount. Owning a line of credit gives you the freedom to use the amount whenever required.
The Repayment Method
The repayment method of both loans has a great difference. The repayment of a conventional loan happens in instalments of a prefixed amount whereas the repayment of a personal line of credit doesn’t happen in instalment. One can pay any amount above the minimum payable which is determined by the credit provider. One can even pay off the whole amount within the first month of availing the credit. So if you are a sincere borrower, you can make the best use of your personal line of credit. But if you ignore your payments, you may be burdened with a quite big amount of interest payable.
The Chances of Approval
A conventional personal loan comes from a conventional lender who generally works offline. It may surprise many of the potential borrowers that more than 50% of personal loan applications are rejected as the applicants do not meet the eligibility criteria. The conventional lenders are very strict in checking the loan eligibility. On the other hand, the eligibility terms are much flexible with online lenders. So the chances of getting instant approval on your personal line of credit are much easier than getting approval in a conventional personal loan.
The Processing Time
If you are in an urgent need of money, the turnaround time of your loan matters a lot. A conventional loan includes processes like going to the bank, filling the application form manually, checking the loan eligibility by the lender and so on which can take as long as a week to disburse the loan. Instead, if you opt for a line of credit, your loan processing will be done within a few hours and the loan will be disbursed within a day or two. The processing of a line of credit is done online which saves a lot of time.
The Bottom Line
So you must have got a clear picture of both the credit products. Understanding the difference between both the credit products in different aspects is sure to help you in taking the right decision. You can choose any of the products depending on your requirements as both of them can help you to fulfil your need for a personal loan.