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Personal Loan vs. Personal Line of Credit: Know the Difference

You may often get confused between a personal line of credit and loan. However, there is a difference between the two. Read on to know all about a personal line of credit and loan.

Personal loan

A personal loan is a lump sum amount sanctioned by the financial institutions. It is an unsecured credit facility that allows you to meet an emergency fund requirement. You pay either a fixed or variable rate of interest on the loan amount. It is suitable if you have one-time fund requirements. You may easily apply for personal loans online for a simple and quick process.

Personal line of credit

A personal line of credit sanctions a certain amount. However, you have the flexibility of withdrawing the amount as and when needed. There is no limit on the number of withdrawals and interest is payable only on the amount used. You may also repay the money at any time without any penalties. Moreover, you may reuse the money if required, thereby providing versatility.

Choosing a line of credit

If you have recurring fund requirements, then a line of credit is beneficial. If you are self-employed or work on a commission basis, there may be some months when your income may be low. In these months, you may benefit from a personal line of credit. The borrowed amount may be easily repaid when your income during a month is high.

A line of credit is also beneficial if you are working on projects like a home improvement that do not have defined costs. You may withdraw the funds whenever you need to infuse money into the project. In such situations, you do not need to pay the personal loan interest rates on the entire amount in case the total borrowed funds are not required.

Choosing a personal loan

If you know the exact amount of funds required with no future variations, you may apply for a personal loan. In case you need money to consolidate your debt obligations, personal finance may be more advantageous. You know the exact amount required that does not require any flexibility, thereby ensuring you do not pay a higher rate of interest associated with a line of credit.

Other instances where personal finance may be beneficial include car repairs, wedding, and payment of medical bills. The funds required are fixed and often needed for the short-term and do not require flexibility in withdrawals.

Eligibility criteria and documents required for a personal loan

It is recommended you check the personal loan eligibility criteria before applying for one. Here are some eligibility requirements:

  • Your business should be in existence for at least three years if you are self-employed
  • Profit after tax (PAT) should be positive during the two previous years
  • Minimum and maximum age at maturity should be 28 years and 68 years, respectively
  • For salaried applicants, the age must be between 23 years and 58 years at maturity

Here is the list of documents required for a personal loan.

  • Income proof
  • Photo identity
  • Business proof
  • Address proof

Most banks and non-banking finance companies (NBFCs) offer these types of loans. It is important you compare different lenders and use a personal loan calculator to make an informed decision.