A personal loan and a personal line of credit work quite similarly and they are often misconceived. However, both these financial products have significant and are meant for different purposes. Let’s understand both the variants of a personal loan in detail.
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A personal loan, also known as a personal instalment loan is an unsecured type of loan. The main features of a personal loan are mentioned below:
- There will be a fixed repayment period and a fixed interest rate throughout the loan tenure. Some banks also provide personal loans with variable interest rates.
- You can repay the entire loan before the end of your loan tenure but there can be a prepayment penalty associated with it. This penalty differs from bank to bank. Generally, it ranges from 2.5% to 3% of the outstanding principal amount. In Singapore, the effective interest rate for a personal loan ranges from 9% p.a. to 15% p.a.
- anks charge a one-time processing fee which may be waived.
- Banks assess your annual income, overall debt that you have, and your credit score before granting the loan.
It is a form of revolving credit which does not require a collateral. It brings in the flexibility to use the loan amount whenever required. The features of a personal line of credit are given below:
- The effective interest rate ranges from 17% p.a. to 20% p.a. The interest rate for a credit line is usually higher. Some banks have promotional interest rates for personal line of credit which will be lower than the regular rates.
- There can be an annual fee associated with credit lines.
- There won’t be a fixed repayment on a monthly basis. You can pay the minimum repayment amount during a particular month and pay the rest in the next month.
- You can redraw on your existing credit limit.
Choosing Between a Personal Loan and a Personal Line of Credit
Both the loan variants have their merits and demerits, but you must choose one based on your requirements. Every time you need a personal loan you must apply for it, whereas, in case of a personal line of credit you can apply once and usually borrow up to 4 times your monthly income, and in some cases up to 10 times your monthly income (subject to availability of your credit limit).
When to Choose a Personal Loan
- You must consider this type of loan under the following circumstances:
- When your loan amount is fixed and there’s very little chance of you requiring additional money.
- When you can afford the fixed repayment amount every month.
- When there’s a huge and unexpected expenditure and you wish to repay it over a long period.
- You can also consider this loan for improving your credit score.
When to Choose a Personal Line of Credit
You can opt for a personal line of credit under the following circumstances:
- When your loan amount is not fixed and you may need additional money on a recurring basis. For example, you may need funds in different stages for your home improvement project.
- When you can repay the loan earlier than a personal loan. This way, you won’t incur any early repayment fees.
- When you want the option to make flexible repayments based on how much you borrow rather than the obligation to repay a fixed amount every month.
Having clarity on both these loan types, you must wisely decide amongst them based on your requirement. You must consider the rate of interest for both the loans, calculate your repayment capability per month and then go for the best one which suits your situation.