16 DECEMBER, 2021

For every product and service you wish to avail, there are numerous other alternatives available. However, the presence of such choices often leads to confusion and dilemmas. For example, if you need additional funds for your wedding, medical emergency, house renovation, etc., you can take either a personal loan or a personal line of credit. However, to choose between the two, you must know the difference between them.

Here is a brief guide on the difference between a personal loan and a personal line of credit.

What Is a Personal Loan?

A personal loan is an unsecured loan that you can avail from a bank or financial institution at a certain interest rate. You need not furnish any collateral to avail this type of loan. The usage of personal loans is open-ended. You can use it for medical emergencies, travel plans, consolidation of debts, home renovation, business expansion, paying for higher education, wedding bills, etc. The lender disburses the loan amount in a lump sum. You can repay the amount in equal instalments by opting for a suitable tenure.

What Is a Personal Line of Credit?

A personal line of credit works similar to a credit card. It is an unsecured revolving credit line that has a variable interest rate and a credit limit. From the credit limit, you can borrow as much as you want and pay the interest only for the borrowed amount. Moreover, you can keep accessing your credit line as per your requirement. It has a lower interest rate than credit cards and so is a cheaper option for big cash advances. It is best for people who have irregular income.

Difference between a Personal Loan and a Personal Line of Credit

Basis

Personal loan

Personal line of credit

Meaning

You can avail a personal loan from a bank or financial institute to fulfil your varied needs

A personal line of credit is a pool of funds from which you can draw for your various needs

Interest

You need to pay an interest amount on the entire loan amount

You pay the interest for only that amount which you draw and use

Flexibility

Flexibility only in the usage of money

Flexibility in the time, amount and usage of money you borrow

Additional requirement

If you require more funds, you would need to apply for a fresh personal loan

You can withdraw more funds from the credit limit once you repay the earlier amount

Affordability

It could be expensive as you need to pay the interest for the entire loan amount

It is a more affordable means of finance as you only pay for the funds you use

It would be best to assess your needs before you choose between the two. It is better to go for a personal loan when you know the amount of money, repayment capacity and purpose for the loan. If not, you must prefer a personal line of credit. Before deciding, it would be best to use tools like a personal loan calculator to make an informed choice.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.