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Key Differences Between Lines of Credit vs Personal Loans

Line of Credit vs Personal Loan - What to Know
Austin Kilham
Austin KilhamUpdated March 27, 2025
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
When it comes to borrowing money, personal loans and lines of credit are two common options, but they function in distinct ways. Both can provide financial flexibility for expenses like home renovations, medical bills, or debt consolidation, yet their structure, repayment terms, and interest rates differ significantly.Understanding the key differences between a personal loan and a line of credit can help you choose the right option for your financial needs. While personal loans offer a lump sum with fixed payments, lines of credit provide revolving access to funds as needed. Let’s explore how each works and which might be best for you.

What Are Personal Loans?

A personal loan is a type of loan that gives you a set amount of money in one lump sum. You then repay that amount, plus interest, over time by making regular payments over the length of the loan. Personal loans usually have repayment terms of two to five years, but they can be as long as seven years.The interest rate, which is the fee lenders charge borrowers, is calculated as a percentage of the loan amount. With a personal loan, the interest rate is typically fixed, meaning it won’t change over the life of the loan and your payments will always remain the same. Personal loans are typically unsecured, which means you do not need to use an asset to secure the loan. With a secured loan (like a mortgage, which uses your home as collateral), banks have the ability to seize the property to recoup any losses if you fail to repay the loan. Personal loan amounts typically range between $1,000 and $100,000 depending on the lender and your creditworthiness. You can apply for a personal loan through a local bank, credit union, or online lender.Recommended: Home Equity Loans vs Personal Loans: Pros and Cons Comparison 

What Is a Personal Line of Credit?

A personal line of credit is a flexible borrowing option that allows you to access funds up to a predetermined limit as needed, rather than receiving a lump sum upfront. Unlike a traditional loan, you only pay interest on the amount you use, and once repaid, the funds become available again.Personal lines of credit typically have variable interest rates and can be used for various expenses, such as home improvements, medical bills, or emergency costs. They provide financial flexibility and can be a useful tool for managing cash flow, but responsible borrowing is essential to avoid accumulating excessive debt.Recommended: Personal Line of Credit vs HELOC: The Differences, Similarities, & Examples 

Difference Between Personal Loans and Personal Lines of Credit

When deciding between a personal loan and a personal line of credit, there are some key differences to be aware of. 

Loan Amount

Personal loans require that you know exactly how much money you’ll need so that you can borrow the full amount in a lump sum from your lender. Personal lines of credit, on the other hand, are more flexible in that you borrow on an as-needed basis up to your spending limit. Once you use and repay the funds, you are free to use them again.Recommended: How Much Can You Borrow With a Personal Loan?

Repayment Terms

Monthly payments for personal loans are fixed, meaning the amount you pay each month won’t change over the course of your repayment period. Payments for a personal line of credit can fluctuate widely from month to month because they are based on how much you owe and current interest rates on the account.

Interest Rates

Personal loans typically have a fixed interest rate that’s set when you sign for the loan and doesn’t change over time. Personal lines of credit offer variable interest rates which are tied to the prime rate. If the prime rate increases, so will the interest rate on the line of credit. A variable rate can make it tricky to build your monthly payment into your budget. Personal lines of credit also tend to have higher interest rates than personal loans.Recommended: Average Personal Loan Interest Rates

Fees

When you take out a personal loan, the lender may charge an origination fee, which can be anywhere from 1% to 8% of the loan amount. There may also be an application fee and an early pay-off (or prepayment) fee if you pay off the loan before the end of its term. Personal lines of credit may also charge origination fees and annual fees, and both types of loans will usually charge late payment fees.

Personal Loan vs Personal Line of Credit at a Glance

Personal LoanPersonal Line of Credit
Loan AmountFixed amount, typically up to $100,000You borrow what you need up to limit, which is also typically up to $100,000
Repayment TermsFixed monthly payments for a set periodRepayment amounts vary according to loan size and current interest rate
Interest RateFixedVariable

Typical Requirements for a Personal Line of Credit vs Personal Loan

When you apply for a personal loan or personal line of credit, lenders will look at your credit score and verify your income to determine whether to extend credit to you. In doing so, they are trying to assess the risk you may pose, or, in other words, whether you’ll be able to repay the loan on time. Minimum credit score requirements tend to be higher for personal lines of credit than for personal loans. For example, many lenders require a minimum credit score of 670 to approve a line of credit. It may be possible to get approved for a personal loan, on the other hand, with a score of 580. In both cases, however, higher scores can lead to a lower rate and more favorable terms. If your scores are lower than where they need to be, you may want to work on building your credit before you apply for a personal loan or line of credit.

Weighing your Financing Options

Here’s a look at when you might consider a personal loan vs. a personal line of credit.

When You Might Consider a Personal Loan

Because you need to know how much money you’ll need up front when you take out a personal loan, good uses for a personal loan include consolidating debts and other one-time costs, such as a home or car repair, vacation, wedding, or medical expense. This type of loan doesn't require collateral, typically offers a lower interest rate than a personal line of credit or credit card, and is easy to work into your budget since it has a fixed interest rate and fixed monthly payments. 

When You Might Consider a Personal Line of Credit

A line of credit is a flexible form of borrowing that can be useful when you aren’t sure exactly how much money you are going to need to borrow. For example, you could use a personal line of credit to fund an ongoing home renovation project. Lines of credit can also be useful for covering emergencies and for those with variable income, since it can help cover expenses during gaps in income.As with a credit card, you only pay interest on the portion of the credit you use. However, the interest rates for lines of credit are typically lower than they are for credit cards.

The Takeaway

Personal loans offer funds in one initial lump sum with relatively lower interest rates, while personal lines of credit give you the flexibility of accessing funds as needed up to a predetermined limit. If you’re anticipating a large one-off purchase or expense and would like to have predictable monthly payments, a personal loan could be a good fit. If you’re curious about what rates and terms you might qualify for, Lantern by SoFi can help. With our online comparison tool, you can quickly compare personal loan rates to find the best deal.

Frequently Asked Questions

What’s the difference between personal loans and personal lines of credit?
When should I choose a personal loan?
When should I choose a personal line of credit?
Photo credit: iStock/staticnak1983
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About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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