Line of Credit vs Loan (2024)

FAQs

Line of Credit vs Loan? ›

Is It Best To Get a Loan or a Line of Credit? Loans are best for large, one-time, fixed expenses, like a house or car. Lines of credit, which are revolving credit lines, are better for projects or purchases that need flexibility and they also may be used more than once for everyday purchases or emergencies.

Lenders often have higher credit score requirements for lines of credit compared to personal loans. For example, borrowers should aim to have a minimum credit score of 670 when applying for a line of credit. However, there are personal loans available that only require scores of at least 580.

Limits for lines of credit are often higher than credit cards and usually start at about $5000 up to hundreds of thousands of dollars for a Home Equity Line of Credit (HELOC). As the limits are higher, a LOC can be harder to qualify for. You need to have both good credit and proof of good income.

Access to Funds When You Need Them

Lines of credit can offer flexibility by letting you borrow what you need, when you need it. This could help manage cash flow or cover unexpected expenses like medical bills and car repairs.

The Bottom Line

Though lenders will each have their own qualification requirements when it comes to credit scores, you could get approved for a line of credit if you have a score of 660. However, your chances of approval (and getting better interest rates) increase if your score is closer to 713 and above.

To land one, you'll need to present a credit score in the upper-good range — 700 or more — accompanied by a history of being punctual about paying debts. Similar to a personal loan or a credit card, an unsecured personal line of credit gets bank approval based on an applicant's ability to repay the debt.

Personal loans are best for one-time, set expenses. Personal lines of credit are best for projects or purchases that require flexibility. Both options offer lower average rates than credit cards for borrowers with good credit. Repayment terms depend on how much you borrow and the length of your term.

What Are the Disadvantages of a Line of Credit? With any loan product, you can run the risk of getting into more debt than you can manage. If you cannot pay off the credit that you use, then your credit score will decline.

Like credit cards, a line of credit is considered revolving debt and treated similarly when generating your credit score—if you make your payments in full and on time, it will reflect positively in your credit score. In this article, you will learn: How lines of credit work.

This allows them to look at your history from the past seven years and see whether you've typically made payments on time. For a $30,000 loan, you'll typically need a credit score above 600 just to qualify or above 700 to get a competitive rate.

Is it hard to get a credit line? ›

How hard is it to qualify for a personal line of credit? It can be hard to get an affordable personal line of credit if your credit score is below 680. Instead, you might want to consider a credit card for bad credit. Just pay your balance in full each month so you can avoid paying interest.

What should my credit limit be? Your credit limit should be at least 3 times higher than your usual monthly spending. That's because your overall credit utilization ratio should stay below 30%. If your spending exceeds that, you risk damaging your credit score.

A line of credit gives you ongoing access to funds that you can use and re-use as needed. You're charged interest only on the amount you use. A line of credit is ideal when your cash needs can increase suddenly, such as with home renovations or education.

The bottom line

There's no magic amount of credit that a person “should” have. Take as much credit as you're offered, try to keep your credit usage below 30 percent of your available credit and pay off your balances regularly.

It's generally recommended that you have two to three credit card accounts at a time, in addition to other types of credit. Remember that your total available credit and your debt to credit ratio can impact your credit scores. If you have more than three credit cards, it may be hard to keep track of monthly payments.

Is It Best To Get a Loan or a Line of Credit? Loans are best for large, one-time, fixed expenses, like a house or car. Lines of credit, which are revolving credit lines, are better for projects or purchases that need flexibility and they also may be used more than once for everyday purchases or emergencies.

The time it takes to get a line of credit approved can vary based on the type of credit and several factors. Regular credit card applications can be approved within minutes, while home equity lines of credit typically take 2 to 6 weeks.

Usually requires good credit: Lenders often require good or excellent credit (a score of 690 or above) to qualify. Interest rates and monthly payments aren't fixed: PLOCs usually have variable APRs, meaning monthly payments can fluctuate over time.

How Long Approval Takes on Lines of Credit. With most financial institutions, you can apply for a line of credit online in just a few minutes. Approval on the average line of credit, however, takes a bit longer. Most lenders can take anywhere from 1 to 2 weeks to get you access to your funds.