Loans vs. Credit Line: What’s The Difference Between Loan And Credit Line?

A loan and a credit line are two different ways of borrowing money. But what are the differences between the two? And what are the pros and cons of each? Read more to find out which one is right for you.
Loan vs. Credit Line: 5 Key Differences, Pros & Cons, Similarities

Loan vs. Credit Line: Loans and credit lines are two different ways businesses in which individuals can borrow from lenders. The main difference between a loan and a credit line is that a loan amount of money has to be repaid at a fixed term, but in a credit line, the borrower can draw, repay and redraw from the funds. Approval for both loan and credit line depends upon the borrower’s financial history and credit rating.

Let’s take a closer look at Credit Line vs. Loan

DebtsBoth are bank-issued debts to serve various needs
RevolvingCredit lines are revolving, while loans are non-revolving
SourceBoth are good sources of finance
Based UponBoth are based on the specific needs of the borrower

What Is A Loan?

What Is A Loan? If we look at the loan meaning, it is a specific amount that depends upon the borrower's need and is granted for only one-time use. So, in a loan, the credit advance cannot be used over and over again like a credit card. Loans can be of two types, secured or unsecured. A fast loan is one which is backed by some type of collateral; for example, a car loan is secured by the vehicle, and if the borrower is not able to fulfill the financial demands, then the lender can repossess the car, sell it and have the remaining loan balance. On the other hand, an unsecured loan is not backed up with any kind of collateral, and the approval of these loans relies only on borrowers' credit history. Secured loans have lower interest rates, while unsecured loans have higher interest rates.

If we look at the loan meaning, it is a specific amount that depends upon the borrower’s need and is granted for only one-time use. So, in a loan, the credit advance cannot be used over and over again like a credit card. Loans can be of two types, secured or unsecured. A fast loan is one which is backed by some type of collateral; for example, a car loan is secured by the vehicle, and if the borrower is not able to fulfill the financial demands, then the lender can repossess the car, sell it and have the remaining loan balance. On the other hand, an unsecured loan is not backed up with any kind of collateral, and the approval of these loans relies only on borrowers’ credit history. Secured loans have lower interest rates, while unsecured loans have higher interest rates.

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What Is A Credit Line?

What Is A Credit Line? If we look at a credit line meaning, it is the amount of money borrowed by a person in which a bank or financial institution sets a limit that a person can use over and over again. This makes a credit limit revolving, which makes it one of the most flexible borrowing tools. Unlike loans, credit lines can be used for many purposes like everyday purchases, small renovations, managing trips and paying high interests debts. A person's credit line works similarly to his credit card, and the person can use the funds whenever he needs them as long as the credit is available. But credit lines have higher interest rates as compared to a loan. The payment method is monthly and made up of both interest and principal. The credit line of a person has an impact on his credit reports and credit scores as well.

If we look at a credit line meaning, it is the amount of money borrowed by a person in which a bank or financial institution sets a limit that a person can use over and over again. This makes a credit limit revolving, which makes it one of the most flexible borrowing tools. Unlike loans, credit lines can be used for many purposes like everyday purchases, small renovations, managing trips and paying high interests debts. A person’s credit line works similarly to his credit card, and the person can use the funds whenever he needs them as long as the credit is available. But credit lines have higher interest rates as compared to a loan. The payment method is monthly and made up of both interest and principal. The credit line of a person has an impact on his credit reports and credit scores as well.

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Credit lines tend to have higher interest rates, lower dollar amounts, and smaller minimum payment amounts than loans. Payments are required monthly and are composed of both principal and interest. Also, lines of credit usually impact consumer credit reports and credit scores much faster and more significantly. Interest accumulation begins only once you make a purchase or take out cash against the credit line.

5 Differences Between Loan and Credit Line

ComponentsLoanCredit Line
DefinitionIt is a specific amount that depends upon the need of the borrower and is granted for only one-time use; in the loan, the credit advanced cannot be used over and over againIt is an amount of money borrowed by a person in which a bank or financial institution sets a limit that a person can use over and over again
ApprovalLoan approval depends upon the financial history and credit score of the borrower.A credit line is not much difficult to approve. It depends upon the credit reports and relationship with the lender.
Borrowing LimitsIn a loan, the borrower has access to the amount only onceThe credit line allowed the borrower to pay back and borrow again at any time
InterestDuring the loan, interest occurs on the amount right at that timeIn credit line, interest only occurs when funds are accessed
PurposeA loan is mostly given to fulfill basic needs like a house, vehicle or educational finances.A credit line can be used for any purpose, from purchasing something or paying bills.

Loan vs. Credit Line Similarities

  • Whether it’s a loan or credit line, both are businesses which allow consumers to borrow money for basic needs.
  • Approval for both the loan and the credit line depends upon the borrower’s financial history and credit rating.
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Loan vs. Credit Line Examples

Loan Examples

  • Personal Loan
  • Auto Loan
  • Student Loan
  • Home Purchase Loans

Credit Line Examples

  • Business Line of Credit
  • Personal Line of Credit
  • Home Equity Line of Credit

Loan vs. Credit Line Pros and Cons

Loan Pros and Cons

Loan Pros and Cons

Pros of Loan

  • Loans are a very good option when it comes to large purchases or big investments.
  • Loans are people’s first choice for fulfilling their personal needs, like purchasing a car or buying a new house.

Cons of Loan

  • Loans mostly have fixed interest rates; for example, if you take out a loan at a 5% of interest rate, then this rate will not change during that time period of the loan.
  • Loans are not a good option for small purchases and other things like paying bills or going on vacations.

Credit Line Pros and Cons

Credit Line Pros and Cons

Pros of Credit Line

  • Having a credit line gives you access to funds you can use and repay over and over again in a certain time period.
  • Credit lines are a good option for small and ongoing expenses; for example, a small business can use a credit line to pay office material bills or staff salaries.

Cons of Credit Line

  • Although credit lines provide an advantage to being used repeatedly, these have the highest interest rates as well.
  • Credit line does not provide a large dollar amount which means these cannot be used when it comes to purchasing homes or cars.

Comparison Chart

A loan and a credit line are two different ways of borrowing money. But what are the differences between the two? And what are the pros and cons of each? Read more to find out which one is right for you.

Comparison Video

BMO | Loan vs. Line of Credit: What’s the Difference?

Conclusion

Loan and credit lines are both used to describe a business in which a lender allows the borrower to borrow money on their own conditions and principal. If we talk about loan Vs. credit line differences work differently; for example, a loan only allows the borrower to access the money once, while a credit line allows the borrower to repay and borrow again. Moreover, in loan versus credit line interest rate, the credit has higher interest rates but also offers a lower amount of money than a loan. 

Alex Stantor

Alex Stantor is a Sorbonne University (Paris, France) graduate in Philosophy and Data Analysis. Currently, he is an Author and Researcher at Difference 101, he writes articles/blog posts on topics such as "thinking differently" and "the importance of difference". Alex is a passionate advocate of diversity in the workplace and in companies, and diversity and inclusion in corporate communications. He currently lives in Brooklyn.

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