Line of Credit Loans and Fixed Short Term Personal Loans Compared

Many people use short term personal loans for a number of different purposes. In this area, you could potentially get a line of credit or a fixed short term personal loan. Both options have some benefits and drawbacks associated with them. Here are the basics of each type of loan. 

Line of Credit Loans

  • Draw period- With a line of credit loan, you will be given a credit line and a draw period where you can access it. This means that you will be able to borrow money until you reach the maximum on the account or until the draw period is over. Depending on the type of line, you may or may not have to borrow a certain amount at the beginning of the loan. For this reason, many people use them as a kind of "rainy day" fund. They keep them around just in case they need emergency funds in the future. The flexibility that this setup provides will allow you to borrow money only when you need it and in exactly the amount you need.
  • High interest rates- Lines of credit typically come with a higher interest rate than a fixed short term personal loan. You do get flexibility on when and what you borrow, but you have to pay for that flexibility in the form of more interest.
  • Adjustable rate- When you sign up for a line of credit, you will typically have to agree to an adjustable interest rate. The interest rate is tied to an index that moves up and down. If the index goes up, your interest rate will raise with it. This means that you will not know what your interest rate will be from one year to the next. This can make budgeting for your monthly payment very difficult.

Fixed Short Term Personal Loans

  • Fixed interest rate- In contrast to the line of credit, you actually get a fixed interest rate with this type of loan. Whatever the interest rate in the market is when you sign up for your loan, is the interest rate that you will have for the life of the loan. This provides you with some consistency from one month to the next. You know exactly what your payment is going to be and you can plan accordingly.
  • Lower interest- Since you are agreeing to a fixed rate, the interest that you pay over the life of the loan will often be much less than with a line of credit. Although the initial interest rate on an adjustable rate loan might be low, the rate will often go up by quite a bit over the life of the loan.
  • Borrow a fixed amount- With a fixed short term personal loan, you have to borrow a certain amount of money at the beginning of the loan. You then immediately start making payments on the loan. This requires you to determine upfront exactly how much money you want. In some cases, this might result in borrowing more money than you need. 
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