Line of credit vs a loan. What’s the difference?
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Line of credit vs a loan. What’s the difference?

Need money for a new car?  Maybe you want to finance fixing up your house? Finding the right loan can become a bit confusing. Mutual 1st Federal wants to make it a little easier by explaining the difference between a line of credit and a loan.


The first question to ask yourself when trying to decide between the two is ‘do you have one large one-time expense you want to finance or multiple ongoing expenses, such as home improvements, medical bills, or education?’ The biggest difference is when the money is given to you and how you pay it back.


Loans

In a traditional loan you are given the funds all at the beginning of its opening and then you start repaying the loan. On the loan you start accruing interest right away and payments typically begin right away also.  If you only want to take out money for a specific purpose like a car loan, then you would want to get an auto loan because you can purchase the car and will start paying it back right away.  What you pay out of pocket on a standard loan doesn’t change; the payments will be the same each month.


Line of Credit

In a line of credit however the funds can be taken out at your leisure. You get a pre-determined amount that you can borrow and those funds are available to you for a certain number of years (usually 5). You can take out the money, pay it back, let it sit for a while; you take out the funds on your schedule. On a line of credit repayment starts 30 days after the funds are accessed. The benefits of a line of credit for multiple expenses is that the funds are approved but you don’t have to use them until you need them; this helps to budget because the expenses are billed at different times or if you aren’t sure exactly how much you need to take out. A line of credit has many purposes thus making it more flexible for you. Since all the funds aren’t getting taken out at once in a line of credit the payments tend to be smaller, too.


There are many different types of loans or lines of credit, and both types can be secured by an asset like a car or home.


Now that you know the difference, use one of our financial calculators to determine your monthly payments and what will fit in your budget. Then talk with one of our friendly loan officers to get started!

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