Why You Can Trust the MarketWatch Guides Team
Here’s a breakdown of how we reviewed and rated top personal loan providers
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Providers RatedOur team researched more than two dozen of the country’s most popular personal lenders, including large online companies like SoFi, big banks like Wells Fargo, and peer-to-peer lenders like Upstart.
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Data Points AnalyzedTo create our rating system, we analyzed each personal loan company’s disclosures, licensing documents, marketing materials, sample loan agreements and websites to understand their loan offerings and terms.
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Loan Features TrackedOur team regularly collects data on each company’s loan offerings and terms, such as minimum and maximum loan amounts, origination fees and discounts.
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Professionals ConsultedBefore we began our research process, we consulted with financial advisors and industry experts to ensure our evaluations covered the banking product aspects that matter most to potential customers.
Personal Loans vs. Personal Lines of Credit
Both personal loans and personal lines of credit are typically unsecured forms of borrowing, meaning they don’t require collateral. Instead, whether you qualify and the amount you can borrow depends on your credit history and income.
However, despite their similarities, personal loans and personal lines of credit have unique features, terms and conditions that set them apart. Understanding these differences is crucial for selecting the borrowing option that best suits your needs and financial circ*mstances.
Personal Loans
A personal loan is a type of unsecured loan where individuals borrow a specific amount of money from a lender and agree to pay it back in fixed monthly installments. Once the loan is approved and the amount is disbursed, you begin making regular payments until the loan is fully paid off. This includes both the principal amount and the accumulated interest.
One of the key features of a personal loan is its fixed nature. This means the loan amount and repayment term are generally set at the time of borrowing. A fixed interest rate makes it easier for borrowers to budget their monthly payments.
Pros and Cons of Personal Loans
Personal loans come with their own set of advantages and disadvantages that can make them more or less suitable for your specific financial needs.
Pros
Versatility: Personal loans can be used for a variety of purposes, such as debt consolidation, home improvement, medical expenses or other unexpected expenses.
Flexibility: Before taking out your loan, you often have a choice between loan terms. This typically ranges from 12 to 60 months, though some lenders may offer longer terms.
Speedy outcomes: Many lenders can approve and fund personal loans quickly, sometimes within one or two business days.
No risk of foreclosure: Since personal loans are usually unsecured, you don’t risk losing your home or other assets if you fail to make your payments.
Cons
May have higher interest rates: Compared to secured loans and some other products, personal loans can have high interest rates — especially for borrowers with poor credit.
Fees: Some lenders charge origination fees, prepayment penalties or other fees.
Risk to your credit score: If you default on a personal loan, your credit score could be damaged and you may be sued by the lender.
Not suitable for all expenses: Personal loans are not suitable for all expenses, such as long-term investments or education costs.
Personal Lines of Credit
A personal line of credit is an unsecured loan that functions more like a credit card than a loan. Instead of receiving a lump sum up front, you’re approved for a certain credit limit that you can draw from as needed. This means you have the flexibility to use only what you need when you need it.
What sets a personal line of credit apart from a personal loan is its revolving nature. As the borrowed amount is repaid, that credit becomes available again for the borrower to use as long as the line of credit remains open. This feature offers a level of flexibility, making personal lines of credit ideal for individuals who may have ongoing or unpredictable expenses.
Interest rates on lines of credit are usually variable, meaning they can fluctuate as often as every month based on market conditions. Variable interest rates can make your repayment amounts less predictable compared to the fixed rates offered by most personal loans.
Pros and Cons of Personal Lines of Credit
As do personal loans, personal lines of credit present a unique set of potential benefits and challenges.
Pros
Flexibility: Personal lines of credit offer borrowers flexibility in how and when they borrow money. Borrowers can withdraw money from their line of credit as needed and only pay interest on the amount of money they borrow.
Revolving credit: Personal lines of credit are a type of revolving credit, which means that as borrowers repay the money they borrow, it becomes available to borrow again.
Often no prepayment penalty: Many personal lines of credit do not have prepayment penalties, which means borrowers can repay their loans early without having to pay a fee.
Potential to improve credit score: Using a personal line of credit responsibly can help borrowers improve their credit scores.
Cons
Variable interest rates: Personal lines of credit typically have variable interest rates, which means the interest rate can fluctuate over time, making it difficult to budget for monthly payments.
Potential for fees: Some personal lines of credit charge fees such as annual fees, transaction fees or inactivity fees.
May have strict eligibility requirements: Personal lines of credit can have strict eligibility requirements, such as a high credit score and low debt-to-income ratio.
Not suitable for all expenses: Personal lines of credit are also not suitable for all expenses, such as long-term investments or education costs.
When To Choose a Personal Loan
Personal loans are generally a better fit for one-time, major expenses where the total cost is known in advance. For example, if you have detailed financial estimates for something like a home improvement project or a car repair, a personal loan can provide the lump sum you need to cover these costs.
Additionally, personal loans can be useful for building or improving your credit score through the responsible management of installment debt. Since personal loans have fixed repayment terms and schedules, timely payments can demonstrate to credit agencies that you’re reliable and can manage debt effectively.
When To Choose a Personal Line of Credit
A personal line of credit is often the better choice for situations where expenses are variable, ongoing or unpredictable. For example, if you’re undertaking a project with uncertain costs that will be incurred over an extended period, a line of credit offers the flexibility to draw funds as needed. Similarly, a personal line of credit can serve as a financial safety net for emergencies, such as unexpected medical bills or urgent car repairs.
However, the revolving nature of this option makes it easy to accumulate debt over time. Be aware of the variable interest rate and read the terms and conditions on the loan type to fully understand your financial commitment.
The Bottom Line
Both personal loans and personal lines of credit give you a way to get your hands on some cash, but they’re tailored for different financial situations. If you have a big one-time expense and you know exactly how much it’s going to cost, a fixed-rate personal loan could be a good bet. A personal line of credit, on the other hand, could be a fit when you need money over a period of time or for emergencies — just keep in mind that the interest rates can change over time based on market fluctuations.
Frequently Asked Questions About Personal Lines of Credit vs. Personal Loans
A personal line of credit is not a loan in the traditional sense, even though both are forms of borrowing. Unlike a loan, which gives you a lump sum up front that you pay back in installments, a line of credit provides a revolving account that you can draw from up to a set limit and pay back over time. You only borrow what you need and you only pay interest on what you’ve borrowed.
Generally, you don’t need collateral for a personal line of credit, as most are unsecured. However, some financial institutions offer secured lines of credit, which may require collateral such as a savings account or property. Secured lines of credit usually come with lower interest rates but carry the risk of losing your asset if you default.
Obtaining a line of credit can be challenging because of the flexibility it offers, which makes it riskier for lenders. Credit score requirements may be higher and lenders will closely scrutinize your income, debt-to-income ratio and credit history to assess your ability to manage a revolving credit line responsibly. Additionally, personal lines of credit are often unsecured, meaning they are not backed by collateral such as a home or car. This makes them even riskier for lenders, as they have no recourse if you default on your loan.
The difficulty in obtaining either a loan or a line of credit depends on various factors such as your credit score, income and the lender’s criteria. Generally speaking, personal loans might be easier to qualify for if you have a decent credit history and a stable income. Lines of credit often require stronger financial standing due to their flexible, revolving nature, which presents a higher risk for lenders.
Editor’s Note: Before making significant financial decisions, consider reviewing your options with someoneyou trust, such as a financial adviser, credit counselor or financial professional, since every person’s situation and needs are different.
If you have feedback or questions about this article, please email the MarketWatch Guides team at [email protected].
Learn more about Divi Sharma
Divi SharmaContributor
Divyakshi Sharma is a professional copywriter and a proud North Carolina State University graduate. Divi is the CEO and founder of Writeable: A Copywriting Agency and works with a variety of different brands, including Atlas Obscura, Bigmouth Copy and Gale Creative Agency. While her 9-to-5 is running her own business, her weekends are filled with hiking, yoga, reading Letterboxd reviews and conducting mostly successful food experiments.
Learn more about Kelly Larson
Kelly LarsonSenior Editor
Kelly Larson is a senior editor with 14 years of experience creating and optimizing data-driven, reader-focused digital content. Kelly enjoys running and exploring the outdoors with his sons.
