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Personal Loan Vs. Line of Credit: Which Should I Get?

Dec. 22, 2017
3 mins
A young woman sits in a cafe with her laptop and a coffee

In today’s ever-evolving market of loan products, it can sometimes feel like there are too many options to choose from – and each with its own complex fine print. Obtaining a line of credit or personal loan from a bank or lender has been a common way for Canadian consumers to get a cash injection for decades.

But what are the differences between the two? And when may someone be advised to apply for a personal loan over a line of credit, or vice versa?

Why should I get a line of credit?

A line of credit has many similar features to that of a credit card, allowing the consumer to borrow money up to a pre-set limit. The borrower can use the funds however they choose and can spend as little or as much of the allotted credit. Most lines of credit also offer interest-only payment agreements, allowing the borrower to pay back the principal balance at any time.

Personal lines of credit may be secured or unsecured, but borrowers are advised to apply for secured lines of credit when possible. A secured credit line typically offers a higher credit limit and has a lower interest rate.

A Home Equity Line of Credit (HELOC) is a popular option in the modern market, enabling consumers to borrow funds against the value of their property. HELOCs are ideal if money is needed for urgent house maintenance or structural or decorative upgrades. The borrower doesn’t start paying anything back until they spend the first dollar from the HELOC.

Why should I get a personal loan?

Personal loans are another great tool for Canadians who want to access money at a reasonable rate. They function like a like a standard loan offered by a bank. In most cases, a credit check is required before approval and the interest rates are competitive (some lenders featured on RATESDOTCA offer rates as low as 4.6% APR, for terms between six and 60 months).

Personal loans are better suited for individuals who require a lump sum to make a payment for a one-off purchase, like buying a car or putting a deposit on a property. Personal loans are offered with a fixed or variable interest rate and borrowers can usually choose between weekly, bi-weekly, semi-monthly and monthly payments. The payments are generally a combination of principal and interest.

Like lines of credit, personal loans can be either secured or unsecured. Secured loans can be backed by property or investments and give the borrower access to higher borrowing amounts and lower interest rates. Unsecured personal loans tend to have a faster approval process, but can offer varying interest rates and payment agreements.

With so many options, it can be difficult to know which type of loan best suits your specific situation. Consider the scenarios above and think carefully about your ability to pay the money back over a realistic timeframe. Only when equipped with all of this information should you hit apply on the loan application.

Joe Rosengarten

Joe Rosengarten is a Toronto-based journalist and editor specializing in financial services and insurance. Originally hailing from London, England, he is the editor of wealthprofessional.ca, a regular contributor to insurancebusiness.ca and canadianrealestatemagazine.ca, and had articles featured in the Toronto Star and the National Post.

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