When it comes to financial products, there is sometimes confusion between loans and lines of credit. Some folks think they are the same. So, what is the difference between a loan and a line of credit? How do you know which one is right for you?
7 Figures Funding explains the distinctions between these two popular financial services in this blog post so you can make an informed decision.
Loan vs. Line of Credit: The Difference?
A loan is a set amount of money given to you all at once. You must repay it over a specific period with interest. On the other end, a line of credit is an open-ended loan that allows you to borrow up to a particular limit as you need it. You only pay interest on the portion of the line of credit that you use, and you can typically renew your line of credit once it’s been paid off.
Now that we’ve clarified the difference let’s take a closer look at loans and lines of credit to see which one might be ideal for you.
As we mentioned, a loan is a set amount of money given to you all at once and must be repaid over a specific time. The interest rate on loan is fixed, which means it will not change, no matter what happens with the market. This can be good or bad, counting on whether rates go up or down. If rates go up, you’ll be glad you have a fixed-rate loan because your payments won’t increase. However, if rates go down, you may feel like you could have gotten a better deal elsewhere.
Another thing to consider with loans is that they usually require collateral. This means that if you can’t repay the loan, the lender can take whatever asset was used as collateral to repay the debt. For instance, if you take out a loan to snag up a ride, the lender can repossess the car if you default.
Line Of Credit: Explained
A credit line is different from a loan in several ways. First, you’re approved for a certain amount of money you can borrow as needed with a line of credit. You don’t have to take out all the money at once as you do with a loan. This can be helpful if you need access to funds but don’t necessarily have a specific project in mind for which you need the money.
Another difference is that with a line of credit, you only pay interest on the money you borrow. So, if you’ve got a line of credit for $10,000 but only borrow $5,000, you’ll only be charged interest on the $5,000. With a loan, you generally have to pay interest on the entire amount of the loan regardless of how much you end up borrowing.
Which One Is Better?
So, which one is better for you? It depends on your individual needs and financial situation. A loan may be the better option if you need a lump sum of cash for a specific purpose, like making a large purchase or paying for home renovations.
But if you need access to funds but don’t have a specific project in mind, or if you only need to borrow small amounts of money over time, then a line of credit may be the better choice.
Let 7 Figures Funding Help You Out!
7 Figures Funding serving Atlanta offers lines of credit and loans to small businesses. We can help you determine the best for your needs and get the funding you need to grow your business. Here’s how to qualify!