Did you know that American household debt hit a record $14.6 trillion in 2021?
It can be hard to know which type of credit product is right for you.
Both personal lines of credit and credit cards have their pros and cons, but it can be tough to figure out which one is the best fit for your needs.
But don’t worry. Keep reading because we created this credit card guide full of credit card tips to help make the decision easier for you. Below we compare and contrast a personal line of credit vs credit card so that you can make an informed decision about which product is right for you.
1. Purpose
A personal line of credit is typically used for larger purchases or for covering unexpected expenses. The borrowing limit is usually higher than that of a credit card, and you only pay interest on the amount that you borrow.
A credit card, on the other hand, has a lower borrowing limit and you are typically charged interest on your entire credit limit, even if you only use a portion of it.
In addition, credit cards are more often used for everyday spendings, such as at stores or restaurants. When choosing between a personal line of credit and a credit card, it’s important to consider what you need the money for and which option will best suit your needs.
2. Amount
One advantage of a personal line of credit is that it usually has a higher credit limit than a credit card. This means that you can borrow more money if you need to.
Another benefit of a personal line of credit is that you only pay interest on the amount of money that you borrow. This makes it an attractive option if you need to borrow money for short-term expenses.
Finally, a personal line of credit can be used for emergencies, such as car repairs or medical bills. If you have good credit, you may be able to qualify for a personal line of credit with a 0% introductory APR.
This means that you can borrow money without having to pay any interest for a promotional period.
3. Interest Rates
Personal lines of credit usually offer lower interest rates than credit cards. This means that you would save money on interest if you use a personal line of credit instead of a credit card.
The lower interest rate on a personal line of credit is because they are considered to be a more secure form of borrowing. Credit cards are unsecured debt, which means that the issuer doesn’t have any collateral to back up the loan.
This makes them riskier for lenders, and they charge higher interest rates to compensate for this risk. Personal lines of credit are typically secured by your home or another asset, which lowers the risk for the lender and allows them to offer a lower interest rate.
If you’re considering taking out a personal line of credit, be sure to shop around and compare rates from different lenders to get the best deal.
4. Repayment Terms
One of the key differences between personal lines of credit and credit cards is the repayment terms. Generally speaking, personal lines of credit come with longer repayment terms than credit cards.
This can be beneficial if you need some extra time to repay the money you borrow. With a personal line of credit, you’ll typically have a few years to repay the debt, as opposed to just a few months with a credit card.
Of course, the exact repayment terms will vary depending on the lender and the size of the loan.
But if you’re looking for some extra breathing room when it comes to repaying your debt, a personal line of credit may be the way to go.
5. Collateral
When you take out a personal line of credit, the lender will typically require you to put up some form of collateral. This may be in the form of a savings account or a piece of property.
Collateral provides the lender with a way to recoup their losses if you default on your loan. Credit cards do not typically require collateral, which may make them more attractive to consumers who do not have any assets to put up for collateral.
However, this also means that credit card companies are at a higher risk of losses if customers default on their loans. As a result, credit cards typically have higher interest rates than personal lines of credit.
6. Fees
Personal lines of credit usually have annual fees, while credit cards do not. This means that there is an ongoing cost associated with using a personal line of credit.
The amount of the fee can vary depending on the lender, but it is typically a percentage of the outstanding balance. For example, if you have a personal line of credit with an annual fee of 1%, and you owe $10,000 to the account, then your annual fee would be $100.
While this may seem like a minor expense, it can add up over time, especially if you frequently carry a balance on your account. In addition, many personal lines of credit have other fees, such as late payment fees or cash advance fees.
As a result, it is important to carefully review the terms and conditions of your personal line of credit before you apply for one. If you’re looking for a credit card, check out this neo financial review.
Personal Line of Credit vs Credit Card: Which One Wins?
Depending on your borrowing needs, either a personal line of credit vs credit card could be the right choice for you. It’s important to understand the key differences between the two before making a decision.
Ultimately, the best choice for you depends on your specific borrowing needs.
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