An unsecured loan and a line of credit are both obtained from lenders but differ. Though they both have high interest rates, with the line of credit, you get revolving debt. The unsecured loan on the other hand is fixed and gets you a lump sum amount. With the line of credit, you can keep getting more as long as you pay. You get the line of credit, use it, pay, and then get more from the lender. This is why it’s vital to pay back line of credit as soon as you can to obtain more.
Unsecured Loans
When you decide to get an unsecured loan then you must have a good credit score. Most renders won’t consider giving you a loan with a low score. The interest rate charged on the loan you applied depends on the lender. Due to the availability of many lenders, interest rates vary from one lender to another making them competitive.
An unsecured loan is a good choice when you have an emergency that requires quick cash to handle. It’s not wise to get this type of loan to pay off another loan because this only lands you more into debt. Later you’ll need yet another loan to pay off this one and normally the Amount you take is more than the one before. However, you can use companies that have friendly term for loan consolidation.
Borrowers that have a good credit score and a relationship with the lender can have their loans processed in a few hours. With a good credit score, a lender establishes your creditworthiness and won’t hesitate to lend you the amount requested. Keep in mind, however, that there are limits to how much you can get as an unsecured loan. The highest amount is normally $100000 payable within 10 years. You have a set amount to pay back together with the origination fees charged and interest.
The duration to pay back this type of loan is long enough and won’t put a strain on your monthly budget. If you default or pay late, then there is a fee charged and adds the amount you should payback. The lender asks for no collateral for this type of loan. It has its benefits and drawbacks.
Line of Credit
Even though a line of credit is still a form of debt, it’s not a loan. With this type of debt, you get an open line of credit from the lender that you can use frequently but only when approved. This form of borrowing is quite flexible because it’s revolving and not fixed like a loan. A similarity between an unsecured loan and line of credit is you can use both for any purpose as there is no limit or conditions set on their use. They’re good for debt consolidation, making purchases, or tackling small projects.
An open line of credit operates in two ways. It can be like a credit card or a checking account depending on the one you want to use. You must keep the account up to date to use it as a credit card and make purchases at any time from anywhere. Always ensure that it has credit in it to avoid embarrassing situations when making purchases or trying to access cash. An example of a limit set for the credit line is $20000. You can opt to use part of this amount or all of it. In case you only use $15000, then the $5000 balance is still available to you whenever you need it.
In case you opt not to use the $5000 and pay off the $15000 used then you have access to $20000 once more. Like unsecured loans, lines of credit are charged a higher interest rate making the amount paid back much more than what you borrowed. They are good to open only when you need them. Payments are made monthly and must include the interest charged and the principal amount agreed upon with the lender. Interest is charged only when you use the money and not before.
There are different types of credit lines that you can open. These are:
a) Individual Credit Line
This is similar to the unsecured loan because you require no collateral to access it. Therefore, you must have a high credit score for the lender to approve this line of credit. The limit you can get on an individual credit line is low and interest charged is quite high.
b) Business Credit Line
Businesses can use this line of credit to handle liquidity matters from time to time. The lender evaluates the total valuation of your business or company before approving a certain limit for you. How profitable the business is also matters to determine the amount you can access as a business credit line. The lender considers whether to give you a secured or unsecured one depending on how much you request and the ability to pay it back.
Unsecured Loan vs. Individual Line of Credit
When you get an unsecured loan, interest is charged as soon as you take the money. With an individual line of credit, interest is charged when you use the money. Only what you use is charged interest and not what remains on the line of credit. An individual credit line is revolving and you can use it again and again as long as you keep up with the payments. With the unsecured loan, you get one lump sum that you must pay over the period agreed. Some lenders charge you extra when you pay back the loan late or earlier. In case you are unable to make your repayment, you should contact the lender to negotiate the terms.
Conclusion
Even though a line of credit and unsecured loans are forms of debt, they’re different. Keep in mind you still must pay back what you borrow or use in the credit line so they carry some aspect of risk. It’s essential to have a good purpose for both before you apply for any of them.
Interest rates charged are high for the credit line and personal loan because they require no collateral. Once approved, you can use the amount on the credit line partially or in full and only pay back what you use. For the unsecured loan, you pay back the total amount borrowed with interest.