If you are thinking about your financing options for a large purchase or project, it may help to learn more about the difference between a loan and a line of credit. These two methods of borrowing money have similarities, including interest payments and credit checks. But they also have differences that make each of them preferable in different situations. Find out which option is best for you with this helpful guide.

Loans

A personal loan is given by a lender as a one-time, lump-sum payment. You’ll agree with the lender exactly how much you want to borrow, and they will set your interest rate and tell you the time period for paying back the loan. Repayments have a fixed end date, and after that, the agreement is complete unless you set up a new loan. Interest rates are usually fixed and won’t change over time.

If you are using financing to pay off a known amount, a loan may be a smart option. This includes paying off existing debt like credit cards or student loans. Other examples are weddings, buying a car, or booking a vacation.

Although loans and lines of credit both require credit checks, it is easier to get a loan than a line of credit if you have poor credit. Loans also help you know how much you are borrowing upfront, so you don’t mount up debt you can’t afford to pay.

Lines of Credit

Taking a line of credit means you have an ongoing agreement with the lender that gives you access to financing when you need it. A line of credit works similarly to a credit card, and it will usually have a variable interest rate that changes based on national interest rates. You only pay interest on the amount you have actually borrowed even if the agreement gives you access to more funds.

You probably won’t know exactly how much you will borrow when you first set up the credit line, and you can borrow and repay multiple times. This feature makes a line of credit ideal for financing an unpredictable project such as remodeling a house. A line of credit gives you flexibility if the amount you need ends up being less or more than you expected.

Whether you choose a loan or a line of credit, rely on Alliance Credit Union in Fenton, MO. This not-for-profit banking institution has helped customers since 1948, and they are proud to offer financing with low fees and interest rates. Call (636) 343-7005 to speak with a friendly member of their team or visit the website for more information.