Loans and lines of credit/credit lines are the different ways businesses and individuals get loans from lenders. Loans have a non-revolving credit limit, which means that the borrower only has access to the amount loaned once, and they subsequently make the principal and interest payments until they pay off the debt.
Credit lines and loans work differently. Similar to a credit card, a credit line provides borrowers with a set credit limit and regular payments that include interest and principal. As opposed to a loan, the borrower has access to the line of credit continuously and repeatedly while it is active.
However, approval of both credit lines and loans depends on a borrower’s credit ratings, financial history, and relationship with the lender.
Loans come in specific amounts based on a borrower’s needs and creditworthiness. Like any non-revolving credit product, one can avail of a loan as a lump sum for one-time use, so the credit advance cannot be used continuously over again like with a credit card. Loans can generally be availed through an app like a student loan app, depending on the kind of loan you need.
Loans come in two general forms: secured and unsecured. In many cases, collateral is what backs the secured loans. This collateral is the same asset for which you avail the loan, e.g., home loans.
A few common types of loans issued by lenders are mortgages, automobile loans, debt consolidation loans, home improvement loans, educations loan online, and business loans.
- Line of Credit
When a line of credit borrower is approved, the bank or a financial institution gives them a set credit limit that they can use over and over again, all at once or in parts, which makes it a revolving credit limit. As a result, it is a much more flexible borrowing tool. Unlike loans, one could use credit lines for any purpose, from purchasing everyday items to spending on trips, minor renovations, or paying down high-interest debt.
A credit line of an individual operates much like a credit card, and in a few cases, it acts as a checking account. It is pretty similar to a credit card, in such a way that individuals can get access to these funds whenever they need them as long as the account is up to date and there is credit available to use.
Three standard credit lines include personal, business, and home equity.
How do you differentiate between a loan and a line of credit?
- While taking a loan, the borrower only has access to the amount loaned in one lump sum, whereas a line of credit is a present borrowing limit that one can use at any time, pay it back, and borrow again.
- A loan depends on the borrowers’ needs, such as purchasing a car or a house from loan apps. However, we could use credit lines for any purpose.
- If there are any closing costs, it’s higher for loans than credit lines. But on the other hand, credit lines tend to have a higher interest rate than loans.
- Interest on loans arises on the total loan amount right away. But the interest on lines of credit only increases when funds are accessed.