Business

Loan Vs Line of Credit: What’s the Difference?

Borrowing money is considered a bad move for many but if you take the correct credit for the right circumstances then you are on the right path. There are many circumstances that may require us to take some sort of loan. People do not borrow money because they want to get in debt, but because sometimes circumstances in life can be harsh.
Accounting

Not everyone has the odds in their favor. Taking a loan is a way for many to escape financial chaos, but it can also be used as a capital for investment. Just take a look at how countries borrow money from one another, they mostly use it to invest in infrastructure hoping for its fruition someday.

There are two particular forms of borrowing money that many get confused; loan and line of credit. Here I will discuss a clear definition between the two.

Loan

A standard loan can be a personal loan, auto loan, student loan or mortgages. Once a financial institution approved your application, you are given as a whole lump sum of money. That is generally used as payment for a particular item like housing, education, and even credit consolidation. Loans are paid in a regular, periodic and consistent installments over a period of time with fixed interest. They are usually amortized, meaning each payment you make is of the same amount of money. Many people take out loans in different form to pay a particular purchase they cannot compensate downright.

Line of credit

A line of credit is a flexible, revolving financial solution provided by a monetary entity offjering a certain credit limit, similar to a credit card. Once approved, you can use and access any amount of fund within your credit limit anytime. It is paid in a pre-specified date, or you can pay it immediately. Once you have accomplished a full payment with interest you can use the fund again.

Still Confused?

Loans are generally for borrowing large amount of money and perfect for one-time big time purchase, while lines of credit are suitable for small unforeseen purchases that gives you leeway for evening out your cash flow. Loans have fixed interest rates, meaning the rate will not adjustment in any way over the course of the loan, while interest rates in lines of credit varies depending on circumstances and payment behavior.

A great difference between these two is the way they are given. A loan is received in a full amount once approved while in lines of credit you will receive the ability, not the money, to borrow an amount. In addition, interest rate will start running once a loan is approved, while the interest will only begin once you make a purchase in lines of credit.

Although, lines of credit look similar to credit cards, they do have difference. Credit cards have a strict minimum monthly payment arrangement while lines of credit do not necessarily include monthly payment. And lines of credit can be secured with assets like car and house.

Similarity

A couple of similarity between loans and lines of credit is the charging of interest. In addition, applying for both of these money borrowing practice can affect your credit score, either negative or positive. Depending on your payment behavior.

There is good and bad debt; it is not defined by the kind of loan or credit you are availing but the way they are being spent. A good debt generates further income and increases your asset. A bad debt is purchasing expensive unnecessary items that depreciate in value and does not generate money. Remember that money is good, but the love of money is the root of all evil.