Difference between Loans and Lines of Credit

A loan of the general kind and a line of credit are two methods of borrowing money for use by individuals and businesses. Loans may be advanced for the purchase of homes as mortgages, student loans, auto loans or personal loans.

Loans are one-time lump sum extensions which are advanced which need to be returned through periodic installments which are consistent. Lines of credit are usually considered as business lines of credit or home equity lines where a borrowing limit is extended to the client with the option that the client can borrow the money again after the initial sum is repaid. Lines of credit are not revolving lines of credit and in most cases, they do not have an end date.

Differences Between Loans And Lines of Credit

A number of differences exist between loans and lines of credit. Advances for the purchase of homes and cars are usually made through standard loans because they are likely to be secured by an asset. The repayments of the money borrowed is decided when the loan is approved and the borrower will have to make a monthly payment on the scheduled date in accordance with the terms and conditions of the loan.

Lines of credit attract higher rates of interest and the minimum payment needed is smaller. They can create bigger impacts on consumer credit reports and credit scores. The closing costs which are often applied for early payment are different and higher for standard loans than lines of credit where the consumer will only be affected by negative credit reports for a short period of time.

Reasons Why Lines of Credit Are Preferred To Loans

When people make an application for a standard loan they are required to explain when the loan is needed and the reasons why it is required. After approval, the entire sum of money requested will be handed over to the applicant and interest will begin to accrue immediately. A date for the monthly repayment of the loan will also be provided and withdrawn from the borrowers checking account on the date mentioned. As loans are secured, borrowers who are not regular with their payments can find themselves in trouble with the bank.

Lines of credit are different in the sense that the borrower receives the option of borrowing a certain amount of money without having to wait for the disbursal by the bank. Lines of credit do not require the applicant to provide any reasons for why they need the money on how they intend to use it. They can use the funds for purchases of any type or even spend the money on a holiday without the approval of the lender. Lines of credit are more flexible than standard loans but can be expensive because of the higher rates of interest which would be applicable.

Lines of credit represent a borrowing tool which is a lot more flexible because the payments that need to be made are usually much more flexible since the sum of money borrowed and the date of the borrowing are constantly fluctuating. It is to offset this uncertainty that banks are charging higher interest rates.

With a number of card issuers willing to offer unsecured lines of credit people make get an impression that obtaining an unsecured line of credit is an easy job which is not exactly the case. Lines of credit which are offered to consumers may look similar to credit cards but they are definitely not identical. A line of credit does not require any monthly minimum payments, unlike credit cards which always do. Lines of credit are also secured by assets to safeguard the interest of the lender. The flexibility offered by a line of credit is perhaps making it the preferred option among consumers who could be preferring the option of having finances without the pressure of making monthly payments.