Personal Line of Credit vs. Personal Loan: Understanding the Difference

Whether you have a surprise expense or just need a bit of extra money for a major purchase, People Driven Credit Union has a plethora of options available to its members. But which one is right for you? Before you make your decision, you should know that PDCU offers more than a dozen different personal loans and quick cash options for different situations, including a personal line of credit. Just like all squares are rectangles, but not all rectangles are squares, every personal line of credit is a type of personal loan, but not every personal loan is a line of credit. Read on to discover the difference between Personal Line of Credit vs. Personal Loan.

How Is a Personal Loan Different from a Mortgage or Auto Loan?

While some people may not know much about personal loans, most people are familiar with mortgages or auto loans. All three types of loans are quite similar.

Like loans to buy a house or a car, a personal loan is an installment loan. However, where a loan on a car or house is secured by the collateral value of that high-value item, many personal loans are unsecured. This means that the processing of a personal loan will typically be quicker, and the flexibility of what you can use the loan for is far greater; however, most personal loans will have higher interest rates than traditional loans.

There are some personal loans that are secured. For example, a PDCU home improvement loan or a CD-secured loan are both types of secured personal loan based on other capital involved with your PDCU account. 

What Is a Personal Line of Credit?

A personal line of credit is a type of a personal loan that is offered by many financial institutions. As such, like the personal loans discussed above, a personal line of credit is an unsecured loan that is not tethered to any major piece of collateral. However, there are a few important differences between the two types of loan.

Most importantly, a personal line of credit is a form of revolving credit. This means you get approval to borrow a certain amount, but will only be charged interest on the amount you use, instead of the full amount. After making one purchase with those funds, you could then go and make a second purchase with some amount of the remaining money. When you pay off the accrued balance, the borrowed amount replenishes. This can be a great way to stick to a budget and control spending, as well as a way to fill in the gaps if you work in an industry where your income fluctuates throughout the year. 

Here is an example: Lisa goes to her local PDCU branch and opens up a personal line of credit for $5,000. She spends $3,000 on a medical procedure, then $1,000 on maintenance for her car. A few months later, she has paid off the $3,000 plus interest, and she has $4,000 available to use for a new home improvement project. 

What makes this situation so different from a traditional loan or a personal loan is that for a personal line of credit, there is no predetermined repayment schedule. You can repay at your own pace and ensure that you will have money when you need it.

How Is a Personal Line of Credit Different from a Credit Card? 

At first glance, a credit card may seem somewhat similar to a personal line of credit. Both are types of revolving credit. However, there are a few key distinctions to be made. 

First, and most importantly, a credit card will typically carry higher interest rates than a line of credit. This means that if amounts go unpaid, you will be paying much more additional interest on your credit card. 

The way in which the interest is accrued is different as well. Once you use a chunk of your personal line of credit, interest will begin to accrue immediately until it is paid off. However, with a credit card, the interest will begin to accrue on a monthly basis, then continue to grow on your unpaid amount from then on. It is a common misconception that if you pay your credit card minimum, you will not be charged interest, but that is not the case. With the exception of certain benefit offers from banks and cardholders (like grace periods or introductory 0% annual percentage rates), you will see a chunk of interest on the unpaid amount on your next bill. 

This means that the repayment plan for your personal line of credit is much more flexible than a credit card, which still realistically functions on a month-to-month basis, much like traditional installment loans. 

Types of Personal Lines of Credit

At PDCU, you can get a general line of multipurpose credit; but we also offer members a few different benefits and options to customize their path to financial wellbeing. 

PDCU offers an Overdraft Line of Credit, or ODLOC, that can help prevent dreaded overdraft fees and declined transactions. If you go over your checking account’s limit, you can draw from the ODLOC, giving you a safety net for any unexpected expenses or mistimed payments. Once you pay off that shortfall amount, your ODLOC will be back to its full preventative power. 

If you set up automatic payments with your PDCU personal line of credit, you may also be eligible for our special loan rate discount program, which will give you a 0.25% APR reduction on your interest.

Types of Personal Loans

PDCU’s personal loan offerings are in the double digits, with a variety of options to fit your different needs. 

There are four different options for unsecured personal loans, including a personal line of credit, a generic personal loan, PDCU’s Everything Loan, and a debt consolidation loan. There are also four different secured loan options: a home improvement loan, a share secured loan, a CD-secured loan and a credit builder loan. Lastly, PDCU offers six different kinds of quick cash options: a general quick cash loan, a graduation loan, a holiday loan, a back-to-school loan, a summertime loan, and a tax relief loan. 

No matter what life throws at you, PDCU members will have the right type of personal loan option to help. 

How Bad Credit Affects Personal Lines of Credit and Personal Loans

While having bad credit will make opening a personal line of credit or obtaining a personal loan more difficult, it is not an impossible hurdle to overcome. 

To start, the most simple way to improve your approval chances is by trying to secure a smaller dollar amount for your line of credit or loan. However, in cases where the amount you need is inflexible, there are still a few tricks you can try. 

If you provide proof of income, like pay stubs or a tax return, it could show your financial institution that you are more prepared to take on a loan than your credit score may indicate. 

If that is not an option, you could partner up with someone who has better credit to join your loan as a co-signer. This reduces the risk for the lender, but be aware that any issues in repaying the loan could put your co-signer in a tough spot. If none of these options suit your situation, you can often still get a loan or line of credit; but your interest rates will be higher than those with strong credit scores. 

The most important thing to remember is that credit unions will typically be more flexible than banks. At PDCU, we look beyond just the number on your credit score and consider the full financial picture, offering a variety of services to help.

How a Personal Loan or Line of Credit Can Improve Your Financial Health 

Personal loans and lines of credit may seem like a way of adding debt into your financial situation, but they can also have positive outcomes for your financial future if you use them to your advantage. 

An example of this would be using a personal loan as a form of debt consolidation. You can take multiple high-interest debts, bundle them together and pay them all off at once, leaving you with a single lower APR payment each month. 

Another option is to use a personal loan for home improvements, increasing the total value of that crucial asset in your portfolio. 

Taking out a manageable loan and paying it off on time can even increase your credit score and make the loan approval process easier for you in the future. 

Comparing Personal Line of Credit vs. Personal Loan

Whether a personal line of credit or a personal loan is better suited to your financial situation, head to your local PDCU branch or reach out online to get started with the approval process. 

FAQs 

What is the Special Loan Rate Discount? 

Our Special Loan Rate Discount offers a 0.25% APR reduction when you set up automatic payments (AutoPay) for your loan from a People Driven Credit Union checking or savings account. This discount is already included in the “as low as” rate advertised. To enroll in AutoPay and receive the discount, please call us at 248-263-4100. A representative will assist you in setting up monthly automatic withdrawals from your PDCU account. Note: The discount is available only for eligible loans with AutoPay set up from a PDCU account. Terms and conditions may apply.

How does a personal loan vs. line of credit affect my credit score? 

A personal loan can impact your credit score both positively and negatively. Making on-time payments can improve your credit score. However, missing payments or defaulting on a loan can harm your credit score. Applying for a loan also results in a hard inquiry, which may temporarily lower your score.

What can I use a  Personal Line of Credit vs. Personal Loan for?

Personal loans can be used for a variety of purposes, including: debt consolidation, home improvements, medical expenses, major purchases (appliances, electronics), special events (weddings, vacations), or emergency unplanned expenses. 

How do I check the status of my loan application? 

Give us a call at 248-263-4100 to speak with the loan department.