Loans and lines of credit are two common forms of credit that are used for different purposes. Here are some of the main differences between the two:
- Structure: A loan is a lump sum of money that you borrow and then pay back over a fixed period of time with interest. A line of credit, on the other hand, is a revolving credit account that you can borrow from up to a certain limit as needed. You only pay interest on the amount you borrow.
- Interest rates: Loans generally have fixed interest rates, which means the rate stays the same throughout the loan term. Lines of credit typically have variable interest rates, which means the rate can change over time.
- Repayment terms: With a loan, you make regular payments over a fixed term until the loan is paid off. With a line of credit, you make payments on the amount you borrow, but you can borrow and repay as needed as long as you stay within the credit limit.
- Purpose: Loans are typically used for larger purchases or expenses, such as buying a car or home, paying for education, or consolidating debt. Lines of credit are often used for short-term expenses or cash flow management, such as covering operating costs for a business or making unexpected home repairs.
- Security: Loans may be secured or unsecured. Secured loans require collateral, such as a home or car, to back the loan. Unsecured loans don't require collateral. Lines of credit can also be secured or unsecured, depending on the lender.
In summary, loans are better suited for one-time expenses that require a lump sum of money, while lines of credit are better suited for ongoing or variable expenses that require access to funds over time. The right choice depends on your specific needs and financial situation.
