Difference Between Loans and Lines of Credit


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When people think about getting a loan, they may often call it a  line of credit. They are not the same. With so many loan alternatives it’s important not to confuse your funding options and what is most advantageous in your specific situation.  Credit Star Funding will always help you to decide what is best for you. Loans and lines of credit are two different kinds of debt issued by lenders to both businesses and individuals. Approval for both loans and lines of credit—also referred to as credit lines—are dependent on their intended purpose, a borrower’s credit rating and history, along with their relationship with the lender.

Loans vs. Lines of Credit

Loans have a non revolving credit limit. You get a set amount, which means you only have access to the amount loaned once, making principal and interest payments until the debt is paid off. A line of credit, on the other hand, works differently. The borrower gets a set credit limit—just like a credit card—and makes regular payments composed of both a principal and interest portion to pay it off. But unlike a loan, you the borrower can use a portion of credit available and make payment only to the amount borrowed. Even when paid off you have has continuous access to the funds.

The main difference between the two is that the loan is not giving you a constant source of money, whereas the line of credit is. A long term solution would be to have an open line of credit that you only use during an emergency. However, a loan can be taken out for any emergency that may arise as well.

Deciding on a Loan or Line of Credit

While you have the option to get either one, one may be better that the other depending on your situation. Loans can come in two different forms: Secured or unsecured. Secured loans are backed by some form of collateral—in most cases, this is the same asset for which the loan is advanced. If you need a whole amount of money for a  project a loan is the way to go because it will cost you less, and will have better rates. Yes you are committing to repay a bigger amount, the payment will be bigger, but could be beneficial for you based on the use of the money and what the return is if you are making an investment or starting  a business.

A line of credit issued to you, may go unused until you need it. Its there waiting for you. For some situations this may be better. If cannot get a loan, a line of credit could be an alternative because they are easier to get. Credit lines tend to have higher interest rates and smaller minimum payment amounts than loans. Payments are required monthly and are composed of both principal and interest. Lines of credit usually create more immediate, larger impacts on consumer credit reports and credit scores. Interest accumulation only begins once you make a purchase or take out cash against the credit line.

Like loans, there are many different kinds of lines of credit:

Personal Line of Credit

This is an unsecured line of credit. Just like an unsecured loan, there is no collateral that secures this credit vehicle. As such, they require you to have a higher credit score. Personal lines of credit normally come with a lower credit limit and higher interest rates. Most banks issue this credit to borrowers indefinitely.

Home Equity Line of Credit (HELOC)

Home equity lines of credit (HELOCs) are secured and commonly backed by the market value of your home. It also factors in how much is owed on the borrower’s mortgage. The credit limit for most HELOCs can be as high as 80% of a home’s market value less the amount owing on the mortgage. Most HELOCs come with a specific drawing period—usually up to 10 years. During this time, you can use, pay, and reuse the funds over and over again. Because they’re secured, you can expect to pay lower interest for a HELOC than you would for a personal line of credit.

Business Line of Credit 

These credit lines are used by businesses on an as-needed basis. The bank or financial institution considers the company’s market value and profitability as well as the risk. A business line can be secured or unsecured based on how much credit is requested, and interest rates tend to be variable.

Credit Star Funding has a reputation of finding loans and line of credits for customers that are low interest and meet their needs. Whether you are looking for a personal loan or line of credit, a business loan or line of credit, you will find that Credit Star Funding can make it happen for you.

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