Personal Loans and Lines of Credit

Personal Loans

Normally, a personal loan is unsecured meaning there is no collateral. When you obtain a personal loan, you borrow an amount of money for a set period of time and pay interest on the outstanding principal balance. Personal loans are often acquired to make a specific purchase, such as furniture, major appliances, consolidate other high interest loans into one monthly payment (debt consolidation), home improvements, and income taxes. Most personal loans are obtained from a bank, credit union, or savings and loan, and have a fixed term. If you make the regular payment each month, you will eliminate the debt within the term of the loan. Because personal loans are unsecured, you typically need to have good credit, unless the loan is a “payday loan” which is secured by a post-dated check and is normally granted with out any sort of credit check.

Personal Lines of Credit

A personal line of credit is a common alternative to a personal loan. When you apply for a line of credit, the lender establishes a credit limit which is always available to you. They are used just as a credit card would be used and typically used for unexpected expenses. You can pay off the balance each month to avoid interest charges and keep the credit line open for future needs. You may borrow what you need, as you need it, in any amount, as long as your outstanding principal balance does not exceed your credit limit. If you reach your borrowing limit, you can pay down the balance and then borrow more. Personal lines of credit are usually unsecured. Typically, there is no fixed repayment period as long as you make the minimum monthly payments and interest rates are normally lower than credit card rates. If your line of credit is with a financial institution, you likely access it with a check, a debit card, or a withdrawal slip. In most cases, banking institutions will link your line of credit to your checking account (often called an overdraft line of credit). As with personal unsecured loans, credit lines are easier to obtain if you have established credit.