Both personal loan and personal lines of credit are considered to be the best financial instruments that can be availed to fulfill any financial need instantly. Talking about personal loans, it can be repaid in easy EMIs for a tenure that you have chosen. The loan amount will be disbursed quickly in your bank account hence you can use the entire money to fulfill your need. While on the other hand, a line of credit is a loan sanctioned to the borrower on which the interest is payable only on the amount that was withdrawn by the borrower. Here, a borrower can take a small amount out of the entire fund for the present need and keep the remaining amount with the bank. Both are considered to be the best financial instrument, and can instantly be used for meeting various financial needs. Though, if you compare both, a personal loan is considered to be an ideal option offering many benefits as compared to the line of credit.      

What is Personal loan?

An unsecured loan that can be availed to fulfill various personal needs. It can easily be availed at an attractive interest rate and flexible tenure options of up to 5 years. It also comes with a maximum loan amount of up to Rs.20 lakh along with a minimal processing fee of up to 2.50% of the loan amount. Once your personal loan application is approved, the loan amount will be disbursed quickly in your bank account. 

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When it comes to repaying the same, with the help of equated monthly installments, you can repay the borrowed amount along with the interest amount till you have taken the loan. A personal loan is an unsecured loan which means a borrower doesn’t need to give security/collateral to the lender. However, a borrower can opt for a personal loan top up, where an additional loan amount is being given to the borrower to cater to his various financial needs.  

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What Personal Loan is normally used for?

  • Credit Card Debt Repayment
  • Home renovation/Extension
  • Medical Expenses
  • Wedding
  • Travel
  • Higher Education
  • Tuition Fee
  • Buying Consumer Durable Products

What is Line of Credit?

In a line of credit, a loan is sanctioned to the borrower on which the interest is payable only on the amount that was withdrawn by the borrower. In a credit line, one receives an outstanding statement similar to a credit card at the end of the month and interest accrued has to be paid on or before the due date. Once the loan amount is approved, the borrower can take a small amount out of the entire fund for the present need and keep the remaining amount with the bank. The interest will be charged only on the amount that the borrower has withdrawn and not on the entire amount. As a result, the customer can manage his or her monthly expenses easily without getting burdened with the loan EMIs. 

What Line of Credit is Used For?

  • Home Improvement/Extension
  • Overdraft Protection
  • Emergency Situations
  • Supplementing Irregular Income

Personal Loan v/s Personal Line of Credit

Personal loans are a one-time loan. It is disbursed at once in a lump sum. Once a customer takes a personal loan, that credit is exhausted. In the case of a personal loan, there’s a fixed Equated Monthly Installment (EMI) that has to be paid each month for the predetermined tenure. The interest rate is charged on reducing balance but it is not the same in the credit line as it works differently.

Whereas, the credit line, takes a different approach. It resembles a credit card in some ways. In other words, one has to pay only the interest on the principal amount utilised and not on the principal amount of loan sanctioned. The principal has to be repaid only at the end of the tenure. The interest rate charged in a credit line is flat but the actual interest charged is on the utilization of the credit line. 

How It Works?

Say, Rs 5 lakh is sanctioned to an individual for 5 years and he withdraws Rs 2.5 lakh, then the interest is charged only on Rs 2.5 lakh. The balance of Rs 2.5 lakh is still available with the borrower to withdraw in installments or as a lump sum. While the interest is to be paid every month, the principal utilised has to be paid in one lump sum at the end of the tenure or can be paid as part-repayment during the tenure.

Interest Rate

Similar to personal loans and credit cards, the credit line loans are also unsecured loans. While a credit card may charge anywhere around 36 percent per annum (around 3 percent on monthly outstanding), a personal or a credit line loan comes at a lower cost. “The range of interest rates is between 10.5% to upwards of 14-15%, depending on the creditworthiness, the credit profile and various other factors. 

Between the two, the credit line may come at a higher rate compared to a personal loan. Although there is no thumb rule behind the current interest rates for both, typically interest rates of credit line based loans are marginally higher than personal loans. Banks and NBFCs have to keep funds blocked anticipating customer withdrawals, this leads to an increase in the cost of funds.

How to Choose: Which One is Better?

If the need for funds is short-term, better to use a credit card and repay the entire amount on the due date. Avoid rolling over the outstanding on to the next month by paying the mandatory 5 percent. In rolling over, one not only incurs high-interest rate but also the interest-free period on the new purchases gets lost.

On taking a personal loan after paying the processing fees, it becomes almost mandatory to run it full course i.e. for the entire duration. Although early termination is allowed any early prepayments or full exit comes at a prepayment charge of about 2-4 percent of the outstanding amount. If one is sure to not be able to arrange the funds (equal to the personal loan amount) in the medium term, personal loans may come handy.

The credit line, therefore, may help meet the bill if the need for funds is for a medium duration and one is rather sure of arranging the funds by that time.

If the requirement is for a higher duration, opt for a person or credit line. Consider their costs adjusting for processing and prepayment fees. If the possibility to arrange for the funds is high in the medium term, better to opt for a credit line, based on the costs, else a personal loan could suit the situation. Overall, the total interest outgo could be less if repaid earlier.