A loan and a line of credit are both types of credit that provide borrowers with access to funds, but they work in different ways.
A loan involves borrowing a fixed amount of money from a lender and repaying it over a set period of time, typically with interest. The borrower receives the entire loan amount upfront and makes regular payments to the lender until the loan is fully repaid. Once the loan is repaid, the borrower no longer has access to those funds unless they take out a new loan.
A line of credit, on the other hand, is a revolving form of credit that allows borrowers to access a predetermined amount of funds on an as-needed basis. The borrower is given a credit limit and can draw funds up to that limit whenever they need them. They only pay interest on the amount of funds they have drawn, not on the entire credit limit. As they repay the borrowed funds, their available credit replenishes, allowing them to borrow again in the future.
The choice between a loan and a line of credit will depend on a variety of factors, including the borrower's financial situation and the purpose of the funds. A loan may be a better option for those who need a fixed amount of funds for a specific purpose, such as purchasing a car or financing a home renovation project. A line of credit may be a better option for those who want the flexibility to borrow funds on an as-needed basis, such as to cover unexpected expenses or to finance a small business.
