Is A Personal Loan Or Line Of Credit Better?
People often ask us the difference between a personal loan and a line of credit especially in relation to their credit report. We will provide the information that you need in this post so that you can make an informed decision.
How you receive the money is the key difference between a personal loan and a line of credit. When you choose a personal loan you receive the money in a lump sum that you have to repay over an agreed term plus interest. A line of credit is different as you can access a credit account to draw from up to an agreed limit.
What is the impact of a Personal Loan with your Credit Score?
When you take out a personal loan it can impact your credit score in several ways. You may find that your overall rating falls on a temporary basis when you take out the loan because you have increased the amount of debt that you have. But when you repay your personal loan on time it should raise your credit score back to what it was and even help to raise it over time.
Credit agencies see that you have increased your debt and may lower your credit score overall based on this loan. There is no guarantee that this will happen as the credit agencies will take your credit history overall into account when calculating your credit score.
What is the impact of a Line of Credit on your Credit Score?
There are a couple of significant factors to take into account here. The first is the credit utilization rate which is an important element of your credit score. It measures the amount of credit used versus the amount of credit you have available.
The activity with a line of credit is important. If you have a bill that you need to pay and use your line of credit to do this then this will help your credit score as you are paying your bills on time. The activity with your line of credit matters as well. If you don’t use it then credit agencies can stop reporting on it and you will not see any benefit for your credit score.
Is a Personal Loan better or a Line of Credit?
It really all depends on your requirements. Personal loans are certainly popular, but sometimes a line of credit is the better solution. For example, if you are a business owner and have a cashflow shortfall in a particular month then a line of credit is the preferred solution.
Another reason for choosing a line of credit is if you need additional cash regularly and you are responsible when it comes to credit. If you need a lump sum to purchase something and prefer the idea of making fixed regular payments, then a personal loan is likely to be the netter choice for you.
By making your personal loan payments in time every month you are very likely to improve your credit score.
Tips for Obtaining Approval for a Personal Loan or a Line of Credit
Here are some tips that should help you to obtain approval for a personal loan or a line of credit:
1. Decide on the type of Loan
It is important that you know the type of loan that you want to apply for. With personal loans there are different types available. A good example is the choice between a secured or unsecured loan.
When you apply for an unsecured personal loan you will not have to put up any collateral such as property that you own or your car for example. Because there is an increased risk to the lender for an unsecured loan they usually charge higher rates of interest. If you were to default on an unsecured personal loan the lender cannot repossess your car or foreclose on your home.
With a secured personal loan you will have to put up some collateral in the event that you default on it. A lender can then seize your assets if you cannot make the repayments. There are other options with personal loans such as:
- Short term loans
- Fixed rate
- Variable rate
- Installment loans
- Lines of credit
2. An improved Credit Score
Lenders will take your credit score into account when determining the rate of interest on a personal loan. If your credit score is below a certain threshold then you could end up paying more than 20% interest on your loan. If your credit score is excellent then you could receive a rate of interest lower than 5%.
This is how lenders usually perceive credit scores:
- Excellent 760+
- Good 700
- Fair 640
Never forget that you can always improve your credit score. If you need to make improvements then one of the best ways to do this is to pay your bills on time and not to miss any payments.
3. Choose the Best Lender
The variety of personal loans offered and the interest rates applied will vary by lender. So you need to do your homework here before you contact any potential lenders. Don’t make the mistake of applying for several personal loans. You may see this as a good way to increase your chances of obtaining a loan but it can damage your future credit score.
4. Don’t Overstretch
It is essential that you do not borrow more than you can afford to repay. Take a good look at your finances and determine a comfortable repayment amount. If you overstretch then you can run into trouble.
You might find that lenders try to persuade you to borrow more than you really need. You need to avoid this as it will raise your debt profile. Be certain about the amount of money you want to borrow prior to approaching lenders.
Contact us here if you need expert advice on your credit score.