Personal Loans vs Lines of Credit: Which One is Better?

When you need extra money — whether for a home repair, medical bill, or consolidating debt — you’ll likely come across two main options: a personal loan or a line of credit. These unsecured borrowing tools can help cover costs when savings aren’t enough. But they work very differently and are designed for different situations.

What is a Personal Loan?

A personal loan is a lump sum of money you borrow from a lender and pay back in set monthly installments over a fixed period. It’s known as an installment loan — and in most cases, you don’t need to put up any collateral like your home or car to get one.

Loan amounts usually start around $1,000 and can go up to $50,000, though some lenders offer even more — sometimes up to $100,000 — if you’ve got strong credit. Repayment terms typically range from six months to seven years.

One of the biggest perks? Most personal loans come with a fixed interest rate. That means your monthly payment doesn’t change, which makes budgeting much easier. These loans are a go-to option for consolidating debt, covering big medical bills, or making a large planned purchase.

Here’s what sets personal loans apart:

You get all the money upfront as a one-time payment
Monthly payments stay the same (thanks to a fixed rate)
The loan has a clear start and end date
No collateral is usually required
Ideal for one-time expenses or paying off multiple debts

Your interest rate, loan amount, and repayment term depend on things like your credit score, income, and how much debt you’re already carrying. And since most lenders report your payments to the credit bureaus, staying on top of your loan can help boost your credit score over time.

What is a Line of Credit?

A line of credit is a more flexible way to borrow money. Instead of a lump sum upfront, you’re given a credit limit — like a credit card. You can borrow as much as you need (up to that limit), pay it back, and borrow again when needed. It’s a revolving account, which means the funds stay available as long as you stay within the terms.

There are both secured and unsecured lines of credit. A common example of a secured one is a home equity line of credit (HELOC), which is backed by your home’s value. Unsecured personal lines of credit don’t require collateral and usually offer limits between $1,000 and $25,000 — sometimes more, depending on the lender and your credit.

Interest rates on lines of credit are often variable, so your rate might change over time with the market. Some come with a “draw period” — typically a few years — where you can borrow and repay as needed. After that, you enter a repayment phase where you’ll pay off whatever you still owe, but you can’t borrow more.

A few key things to know about lines of credit:

You can borrow, repay, and borrow again — it’s revolving
You only pay interest on what you use
Monthly payments can change depending on your balance and rate
It’s great for covering unpredictable or ongoing costs

A line of credit gives you ongoing access to funds, which is super helpful for managing irregular expenses. Just remember that it requires a bit of discipline — it’s easy to overspend or carry a balance longer than planned, which can cost you in interest over time.

How Borrowing Limits Work

With a personal loan, you get all the money upfront — whatever amount you’re approved for is paid out in full. That’s your total borrowing limit. If you need more later, apply for a brand-new loan from scratch.

A line of credit works differently. You’re approved for a maximum limit, but choose how much to borrow and when. As you pay it back, that money becomes available to use again. For example, let’s say your credit limit is $10,000, and you borrow $3,000. You’ll still have $7,000 left to use. And once you repay the $3,000, your full $10,000 is available again — no need to reapply.

How Funds are Disbursed

Personal loans are paid as a single lump sum. Once your application is approved, most lenders transfer the funds to your bank account within 1 to 5 business days. Some online lenders offer same-day or next-day funding.

Lines of credit work differently. You access funds over time through online banking, checks issued by the lender, or linked debit cards. You decide when and how much to withdraw, up to your available limit. This access remains open as long as the line is active and in good standing.

Interest Rate Structure

Personal loans usually come with fixed interest rates, which means your rate and monthly payment stay the same for the entire loan life. That stability makes it easier to plan. Rates can vary depending on your credit: folks with excellent credit might see rates as low as 6%, while those with lower scores could face rates over 30%.

Lines of credit, on the other hand, typically have variable rates. That means your interest rate can go up or down over time based on changes in the market — usually tied to something like the prime rate. As a result, your interest charges and minimum payments might fluctuate from month to month.

So, a personal loan might be the better fit if you’re looking for predictability and a set monthly budget. But if you want flexibility and don’t mind a little rate movement, a line of credit could work — just keep an eye on how much you borrow and how rates are trending.

Repayment Schedule and Terms

When you take out a personal loan, repayment starts once the money hits your account. You’ll make the same monthly payment until the loan is paid off — no surprises. The timeline is set from the start, so you know exactly when the loan will be finished.

With a line of credit, things are more flexible. Your minimum payments usually depend on how much you’ve borrowed and might just cover the interest or a small portion of the balance. That kind of flexibility can be a lifesaver in a pinch, but it also makes it easier to carry a balance for a long time — and rack up interest if you’re only paying the minimum.

Some lines of credit, like HELOCs (home equity lines), come with set borrowing and repayment phases. For example, you might have 10 years to borrow and repay as needed, followed by another 10–20 years to pay off whatever you still owe.

Fees and Additional Costs

Borrowing costs include more than just interest. Each product comes with potential fees that vary by lender.

Personal loans may include:

Origination fees (usually 1% to 8% of the loan amount)
Late payment fees
Insufficient funds fees
Prepayment penalties (though many lenders now waive these)

Lines of credit may include:

Annual or monthly maintenance fees
Withdrawal fees (charged per draw)
Inactivity fees (if you don’t use the line for a certain period)
Over-limit fees (if you borrow more than your credit limit)

Always read the fee disclosures in your loan agreement. Small fees can add up, especially for products you keep open long-term.

Credit Score Impact and Reporting

Both personal loans and lines of credit are reported to the three major credit bureaus—Experian, Equifax, and TransUnion—but they can affect your credit score in different ways.

A personal loan is considered an installment loan. That means you borrow a set amount and pay it back over time in fixed monthly payments. This kind of loan can help your credit by adding variety to your credit mix. Plus, making payments on time builds a strong payment history. And since your balance steadily decreases, it can also help improve your debt-to-income ratio.

A line of credit, on the other hand, works more like a credit card — it’s a revolving account. One of the biggest factors in your credit score here is credit utilization, or how much of your available credit you use. If you use a large chunk of your limit, your score could take a hit, even if you’re always paying on time. Most financial experts recommend keeping your usage below 30% of your limit to stay in good shape.

Approval Process and Requirements

Lenders review several factors to approve personal loans and lines of credit, including:

Credit score
Employment history
Income level
Existing debts
Debt-to-income (DTI) ratio

Most personal loans require a minimum credit score of around 600. You’ll typically need a score of 700 or above to qualify for lower rates or higher loan amounts. Some lenders offer loans to people with scores as low as 560 but charge higher interest rates.

For unsecured lines of credit, lenders often require a higher minimum credit score, usually above 680. Secured lines like HELOCs may have more lenient requirements since collateral reduces the lender’s risk.

Income requirements vary by lender but generally fall between $20,000 and $50,000 in annual income. Lenders also consider your ability to repay the debt based on your financial obligations.

Suitable Uses for Each Option

Knowing when to use a personal loan versus a line of credit can significantly affect how smoothly you manage your finances.

A personal loan is a solid choice when:

You want to pay off high-interest credit card debt with one lower-interest loan
You’re covering a big one-time cost like a wedding, major home repair, or buying a car
You need to handle an emergency expense but prefer a clear repayment plan

A line of credit makes more sense for:

Ongoing costs, like a home renovation that happens in stages
Dealing with inconsistent income or short-term cash flow gaps
Having a safety net in place for surprise expenses

The big difference comes down to predictability. If you know exactly how much money you need, a personal loan gives you structure and certainty. But if you’re not sure yet — or want to borrow as you go — a line of credit gives you more breathing room and flexibility.

Flexibility and Long-Term Access

A personal loan wraps up once it’s paid off. You borrow a set amount and pay it back over time, and that’s it. You must apply for a new loan if you need more money later. It’s a one-and-done deal with a clear beginning and end.

A line of credit, on the other hand, stays open as long as you’re using it responsibly. As you repay what you’ve borrowed, that money becomes available to use again — like a reusable safety net. It’s more of a long-term financial tool that can be useful if you need access to funds on and off for months or even years.

That’s why lines of credit tend to be better suited to people who want flexible, ongoing access to cash rather than a single lump sum.

Risks of Misuse or Overborrowing

Lines of credit can be super helpful — but they can also get you into trouble if you’re not careful. Since they’re easy to dip into and don’t have a set end date, treating them like free money is tempting. Without a solid plan to pay it back, it’s easy to keep borrowing and end up stuck in a cycle of debt with growing interest charges.

Personal loans come with their risks, too. Because you get all the money upfront, some people borrow more than they need. That can mean paying interest on money that just sits there — and a higher overall cost in the long run. Unlike a credit card or line of credit, you can’t just “give back” part of a personal loan once it’s disbursed.

No matter which option you choose, the key is to borrow responsibly. Having a clear budget and repayment plan makes all the difference.

How to Decide Based on Financial Goals

When choosing between the two, ask yourself:

Is my need one-time or ongoing?
Do I want fixed monthly payments or flexibility?
Can I handle a variable interest rate?
Am I comfortable with how either product could affect my credit?

A personal loan is likely your best option if you want structure, predictability, and a fixed payoff timeline. If you need access to funds over time and can manage credit responsibly, a line of credit offers more flexibility.

Final Thoughts

Personal loans and lines of credit are both useful tools when used correctly. One gives you a clear repayment plan, while the other provides flexible access to funds. Understanding how each works — and how it fits your financial goals — will help you make the right choice and avoid costly mistakes.

Additional Resources for Borrowers

Before applying for a personal loan or line of credit, it’s important to educate yourself on how borrowing works, how lenders evaluate applications, and how to compare loan terms. These resources offer trusted, U.S.-specific information to help you make responsible financial decisions.

FDIC – Consumer Loans and Lines of Credit. The Federal Deposit Insurance Corporation (FDIC) offers educational materials about consumer credit, including how lines of credit and installment loans function and how to compare financial products.
MyCreditUnion.gov – Understanding Credit Products. The National Credit Union Administration (NCUA) created this financial literacy platform. It explains the differences between various credit options, including personal loans and lines of credit, and offers advice on responsible borrowing.
USA.gov. USA.gov aggregates federal resources on all types of consumer credit. It includes tips on how to shop for loans, protect yourself from fraud, and understand legal rights under U.S. lending laws.
FICO – Credit Education Center. Understanding how loans and credit lines affect your credit score is essential. FICO, the company behind the most widely used credit scoring model in the U.S., explains how credit inquiries, utilization, and repayment behavior influence your score.
American Bankers Association – Consumer Resources. The ABA offers resources for consumers on managing personal credit, choosing the right type of loan, and communicating with banks about borrowing options.