So you’re a business owner, and you need a spot of money to get your operations up. That’s what banks are for; but now as you’re looking over your options, you’re wondering what the difference is between a line of credit and a loan. Loans we’re all familiar with, but what’s a line of credit?
What’s the Difference?
Both a loan and a line of credit are means of lending you money. However, there are certain differences that separate the two, and one may be better than the other, depending on your circumstances. Here’s how they differ.
When You Get The Money
First and most importantly is how the funds get to the lendee. A loan provides the entire amount up front, which is then applied to its purpose, after which it’s all about repayment. A line of credit, on the other hand, functions more like a credit card. You don’t get a cheque or money transfer right away. Instead, you tap into the line of credit when you make a purchase. Of course, similar to credit cards, lines of credit also have limits; you can borrow up to the limit, after which you must pay it back. Good news is after you pay back what you owe, you can draw on the line of credit once more.
What Funds Are For
Loans generally are taken out to fulfil a given purpose, like the mortgages and auto loans we’re all familiar with. They’ll also need the lender’s appraisal and approval before you get any money. Lines of credit, on the other hand, are more flexible; once you have access to the line, you can apply it to pretty much any purchase in general, without the same need of appraisal of assets or lender’s approval to make purchases. You’re seeking a line of credit in general, not fixed to a specific purpose.
When Interest Builds Up
Of course, the overriding concern of all means of lending is how they’re paid back, and how much interest you accrue. Loans are simple; interest starts from when you take it out, the amount you pay back is known from the beginning, and you pay back in instalments over a fixed time period. A line of credit, on the other hand, will only accrue interest when you make a purchase against it, and only for the amount that you spent. Payments will tend to be more flexible, as the lender doesn’t know when you’re purchasing and the amount that you’ll use. This is, however, offset by generally higher rates of interest, as well as higher lending standards. It tends to be more difficult to secure a line of credit compared to a loan.
What Does This Mean For You?
Loans provide an immediate infusion of cash with a known time period of repayment. Lines of credit are more flexible but more difficult to get, and the higher interest rates and borrowing limit may be greater obstacles. Of course, the interest in a line of credit is only applied to the amount you’ve drawn on, so while the rate may be higher, it’s possible you won’t be paying as much. And on the whole, minimum payment amounts are smaller with lines of credit.
There are other, smaller differences as well. Loans are finite, while lines of credit generally don’t have end dates. In terms of your credit reports, lines of credit tend to have a bigger impact. Closing costs, should they be present, tend to be lower with lines of credit.
So the question really is, what is your current financial need? If you need a given amount of cash now but don’t foresee any further monetary trouble, then a loan is your best bet, and then just sort out repayment afterwards. If you think you may need additional funds at a later time, or if the needs are unpredictable, then a line of credit’s greater flexibility is a better fit for you.
We at &Solved offer both online loans as well as lines of credit, and we’ll work with you to see which would better fit your situation. Look through the rest of our site to learn more, or apply now!