When life throws unexpected expenses at us, such as a home renovation, a wedding, or even a funeral, many people opt to use credit over cash. Credit is especially useful when an expense sneaks up on us and we don’t have enough in our emergency funding to cover the cost of the expense. A personal loan and personal line of credit are both credit options that are available. And while they may sound like the same thing, they are actually different in a lot of ways.
What is a personal loan?
A personal loan is a form of credit that’s given to a borrower as a lump sum amount. It can be used to pay for just about any large purchase, such as a home renovation or medical bills. A personal loan can even be used on unexpected emergencies if an emergency fund is not already set up or does not cover the entire expense.
People also use personal loans as a form of debt consolidation. In debt consolidation a number of debts are paid off in one lump sum. What happens is a person applies for a personal loan for a specific amount of cash and then use the loan money to pay off one or more credit card balances that have higher interest rates than the personal loan they just took out. This can be helpful in saving on interest payments, but still leaves a person in debt as they have to now pay off the consolidation loan.
You’ll have to pay back the loan amount with interest monthly installments that are fixed and equal. Personal loans usually carry a term of two to five years, but they can sometimes be repaid over the course of seven years.
What is a personal line of credit?
Much like a personal loan, a personal line of credit(PLOC) can also be used for large expenses. However, like a credit card, it is a form of revolving credit.
With a personal line of credit, a credit limit is given and a borrower can spend up to that specific amount. As monthly payments are made towards the balance that has been spent, the available credit is restored. Money is spent on an as-needed basis and interest is only paid on what is borrowed. A personal line of credit differs from a personal loan in the way that with a personal loan a borrower needs to know exactly how much they need to borrow.
With a personal line of credit a borrower needs to understand the draw period and the repayment period. During the draw period, a borrower can borrow as much as needed but once the draw period is over and the repayment period begins, they can no longer borrow more credit. Paying back debt can be tricky, and it’s easy to fall behind, especially when unexpected situations arise, such as a loss of job or an unexpected decrease in income.
How should you manage a loan or line of credit?
Regardless of whether a personal loan or personal line of credit is the better option for a borrower, it is always important to make sure a plan is set in place to pay it off. A tip is to only take out a debt that is affordable to pay back, but if life happens and the ability to repay your debt is affected, one may have to seek professional help, such as the assistance of a debt settlement firm.
Stuck in debt? CuraDebt is here to help!
Taking out a personal loan or a line of credit may seem enticing. Unfortunately, when life surprises us with unexpected financial burdens, it is easy to fall behind on the monthly payments associated with these forms of credit. If you have found yourself in this stressful situation, do not panic, CuraDebt is here to help. We have a team of debt relief professionals who are here to help you. Call us toll free today to find out how we can help. 1-877-850-3328.