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When comparing a personal loan vs. a personal line of credit, both sources of funding can be used for a variety of expenses and typically require a hard credit check during the application process. However, there are also differences: specifically, in how the loan funds are disbursed to the borrower and how the credit is repaid.

Here, learn more about deciding whether a personal loan or a personal line of credit might be right for you.

What Is a Personal Line of Credit and How Does It Work?

A personal line of credit (LOC) is a type of revolving credit similar to a credit card. But funds are typically accessed by writing checks provided by the lender or requesting a funds transfer to your checking account instead of by using a card.

An LOC typically allows the borrower to withdraw funds repeatedly, up to the credit limit. Any funds that are withdrawn are subject to repayment with interest. When they are repaid, they can be accessed again up to your particular credit limit. There may be a limit on the number of years the line of credit is available.

Additional points to know:

•   Some lenders may assess fees associated with an LOC. There may be a maintenance charge for inactive accounts. There may also be ongoing fees, monthly or annual, even if the LOC is being used. Some other expenses may include application fees, check processing fees, and late fees, among others. It’s important to be aware of any potential fees before you sign an LOC agreement.

•   Personal lines of credit are usually unsecured, although you may be able to put up collateral to get a lower interest rate. A home equity line of credit, or HELOC, is an example of a secured line of credit.

•   Typically, a personal LOC will be offered by a bank or credit union, and you might have to have another account with the lending institution to be considered for an LOC.

•   If your LOC is unsecured, the interest rate will probably be variable, which means it could go up or down during the loan’s term, and your payments could vary. But you’ll only be charged interest on the amount you withdraw. If you’re not using any LOC funds, you won’t be charged interest.

If you expect to have ongoing expenses or if you have a big expense (like a wedding or home renovation) but don’t know what your final budget will be, this type of borrowing might be a useful financial tool.

A personal LOC also may be the right fit if you need some flexibility with your borrowing. For example, self-employed workers who know they’ll be paid by a client but aren’t sure exactly when, can tap into their line of credit to pay expenses while they wait. They can pay that money back when they receive payment from the client, and they won’t have to use high-interest credit cards or borrow from other savings to make ends meet.

Of course, there are downsides to that easy-to-access money. Here’s a closer look:

•   Since unsecured lines of credit are considered by lenders to be riskier than their secured counterparts, it can be more difficult to qualify at a favorable interest rate.

•   Once you have access, it may be tempting to use the funds for purposes other than originally planned. Keeping in mind the intended purpose for the funds may help you stick to it and not use the funds for other purchases.

Pros and Cons of Personal Lines of Credit

Having funds that can be accessed as needed can be helpful. But there are also some drawbacks to consider. Take a look at how the pros and cons stack up for personal lines of credit.

Pros of Personal Lines of Credit

•   Easy access to funds.

•   Open-ended vs. set distribution of money.

•   Minimal limits on use of funds.

•   Can be useful for ongoing expenses.

Cons of Personal Lines of Credit

•   May have a higher interest rate than other forms of credit.

•   Typically are unsecured, so may be more difficult to qualify for than other forms of credit.

•   Interest rate could be variable, presenting a budgeting challenge.

•   Ease of access can be tempting to use for impulse shopping.

What Is a Personal Loan and How Does It Work?

A personal loan, on the other hand, is a fixed amount of money disbursed to the borrower in a lump sum. If the loan has a fixed interest rate, as is typical for personal loans, the payments are in fixed installments for the term of the loan. If the loan has a variable interest rate, the monthly payments may fluctuate as the interest rate changes in accordance with market rates.

Because personal loans typically have lower interest rates than credit cards, they’re often used to pay off other debts such as home and car repairs or medical bills, or to consolidate other higher-interest debts such as credit card balances into one manageable — and potentially lower — monthly payment.

Here are some more ways these loans are often used:

•   A personal loan can be a helpful tool for debt consolidation. If you can qualify for a personal loan that has a lower interest rate than your other outstanding debts, you may be able to save money in the long run by consolidating those debts. In order for this financial strategy to work, it’s important to stop using the old sources of credit to avoid going deeper into debt.

•   A personal loan also could be a suitable choice for paying for a wedding or home renovation. But it’s important that you feel confident about being able to repay the loan on time and in full. If you don’t responsibly manage a personal loan — or any kind of debt, for that matter — your credit can be adversely affected.

•   You can apply for a secured or unsecured personal loan. A secured loan, which is backed by collateral, is typically considered less of a risk by lenders than an unsecured loan is. Collateral is an asset the borrower owns — a vehicle, real estate, savings account, or other item of value. If the borrower fails to repay a secured loan, the lender has the right to take possession of the asset that was put up as collateral.

Here are a few more points about how the process of getting a personal loan can work:

•   An applicant’s overall creditworthiness will be considered during the approval process. Generally, an applicant with a higher credit score will qualify for a lower interest rate, and vice versa.

•   Some lenders charge personal loan fees such as origination fees or prepayment penalty fees. Before signing a loan agreement, it’s important to be aware of any fees you may be charged.

Pros and Cons of Personal Loans

When you need a set amount of money for an expense, a personal loan can be a good choice. Along with the benefits of using this financial tool also come a few drawbacks to consider.

Pros of Personal Loans

•   May be a good choice for large, upfront expenses.

•   Typically have fixed interest rates.

•   Steady payments may be easier to budget for.

•   May have a lower interest rate than credit cards.

Cons of Personal Loans

•   Unsecured personal loans may have higher interest rates than other forms of secured credit.

•   May need a higher credit score to qualify for lower interest rates.

•   If not used responsibly, it can add to a person’s debt load instead of alleviating it.

•   May have fees.

Major Differences Between Personal Lines of Credit and Personal Loans

When you’re looking for the right source of funding for your financial needs, it can help to compare different types. Here are some specifics to consider when looking at personal LOCs and personal loans.

Considering the Type of Debt

When you’re thinking about applying for a personal LOC or a personal loan, it’s important to consider the effect borrowing money can have on your credit score. If you borrow money without a repayment plan in place, you could run into trouble no matter which borrowing option you go for. But each is looked at differently by the credit bureaus.

A personal LOC is revolving debt, which means it will factor into your credit utilization ratio — how much you owe compared to the amount of credit that’s available to you. This can count as the second most weighty factor (at 30%) toward your score.

For a FICO® Score, keeping your total credit utilization rate below 30% is recommended. That means if your credit limit is $15,000, you would use no more than $4,500.

•  Using a large percentage of your available credit can have a negative effect on your credit score. And lenders may see you as a high-risk applicant because they may assume you’re close to maxing out your credit cards.

•  Using a small percentage of your available credit can work in your favor. If your credit utilization ratio is low (under 10%), it signifies to potential lenders that other lenders have determined you to be a good risk, but you don’t need to use the credit that’s been extended to you.

•  Having a low credit utilization rate by using just a little of your available credit could actually have a more positive effect on your credit score than not using any of it at all. Lenders generally look for signifiers of a healthy relationship with credit.

A personal loan is installment debt and isn’t considered in your credit utilization ratio. In fact, if you pay off your revolving debt with a personal loan, it potentially can lower your credit utilization ratio and have a positive effect on your credit score. A personal loan also can add some positive variety to your credit mix — something else that’s calculated into your credit score.

Personal LOC or Personal Loan: Which Is Right for You?

Before you decide to take out a line of credit or a personal loan, it’s wise to compare lenders. Look at the annual percentage rate and whether it’s fixed or variable. You can also take into account any fees you might have to pay, including origination fees, annual fees, access fees, prepayment penalties, and late payment fees.

Estimating the total cost of the loan until it’s paid in full, including the principal loan amount, interest owed, and any fees or penalties you could potentially be charged, will help you figure out how much the loan will actually cost you.

You might use an online personal loan calculator to help you assess these total costs.

The Takeaway

Deciding when and how to borrow money can be a tough decision. Personal loans and personal lines of credit each have their pros and cons. Personal lines of credit allow you to borrow up to a credit limit, while personal loans disburse a lump sum. Interest rates, fees, and other features may vary. It’s wise to consider your needs and options carefully, reading the fine print on possible offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is it better to get a loan or use a line of credit?

Loans can be better suited for fixed expenses or one-time needs, while lines of credit can offer flexibility for repeated borrowing. Loans often carry lower interest rates but may involve higher upfront fees; lines of credit, on the other hand, may cost more over time due to variable rates and fees.

What are the downsides of a line of credit?

The interest rates for a personal line of credit may be higher than those charged on other sources of funding, and if the rate is variable, that can make budgeting more difficult. Also, there can be fees, such as an annual or monthly maintenance fee and transaction fees.

Does a line of credit hurt your credit score?

A line of credit can involve a hard credit pull when you apply, which can temporarily lower your credit score by several points. After that, how you manage your line of credit can determine how your credit score is impacted. Keeping your usage low and always paying on time can help build your score. Taking on too much debt and missing your payment due dates can lower your score.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-038

It’s a common scenario for students (and sometimes their parents) to borrow student loans to help cover the costs of college. Tuition, housing, textbooks, and incidentals can really add up. But what happens if they take out more in loans than they actually need? In that case, they may receive a student loan refund.

A student loan refund is money that the borrower receives when the loan amount exceeds the amount of money required to pay for qualifying education expenses. The overage amount would come to them as a student loan refund in the form of direct deposit or a check.

Read on for more information on what a student loan refund is and what to do if you receive one.

What Is a Student Loan Refund?

To understand what a student loan refund is, it can be helpful to first look at what college financial aid is and how it is distributed to students. When a student or their parent pursues federal financial aid, such as federal student loans, that aid is distributed via a credit to the student’s account at their college.

Private student loans are distributed differently depending on the lender. Some private lenders may deliver the funds directly to the student. Others may choose to credit the student’s college account, similar to how federal aid is distributed.

Private or federal, this is where student loan refunds may come into play. Here’s how:

•  Student financial aid can cover costs such as tuition, room and board, and fees. On occasion, however, an aid distribution can lead to there being an additional credit in the student’s college account.

•  This happens if there is any excess money after paying for the necessary expenses. In that case, the student or parent will receive a student loan refund via a check or in the form of a direct deposit to their bank account.

•  An example of how this might happen is that funds are sent to the student’s school, where the student’s account only reflects tuition. But the amount was also intended to cover textbooks, which the student will buy separately. The overage in the student loan (the part meant to pay for the books) could then be sent to the student.

•  Or the additional amount might be a case of the student having borrowed more than they actually needed to afford their school costs for a particular time period. Perhaps they signed up for a class that wound up being canceled and are now taking a different class that carries fewer credits and less expense.

How to Get a Student Loan Refund

Whether a student or a parent takes out a federal student loan, the process of getting a student loan refund will generally look similar. Each semester, the school will typically review student accounts to determine if there are any eligible credit balances that can be refunded to the student.

If that is the case, here are some details to know:

•   The school has 14 days to issue a payment to the student if there is credit on their account. In some cases, schools may determine that credit balances should be applied to students’ future costs at the university.

•   In some cases, if the credit is not a result of the student receiving financial aid, the school may require that students request a refund. Follow the refund request process as determined by the school you attend.

•   In general, the school in question will contact the student or their parents in writing any time they distribute any loan money. The loan servicer will also provide confirmation that the loan money was delivered.

•   Alongside this notice, borrowers will generally also receive information on how to cancel part or all of the student loans. If the borrower realizes they don’t need the full loan amount, this may be an option they want to pursue.

•   Know that any amount refunded is still considered part of the total amount borrowed. So, borrowers who receive a portion of their student loans refunded would still be responsible for repaying that amount, with interest, if the refund is not canceled.

•   When it comes to federal student loans vs. private loans, the borrower can cancel all or part of their loan within 120 days of receiving it. They will incur no interest during this time and no fees will be charged.

The process of getting student loan refunds may vary when dealing with private lenders.

•   If the funds were received by the student to pay for qualified expenses, such as textbooks, the student can go ahead and use it for such purchases (more on this below).

Recommended: How and When to Combine Federal Student Loans and Private Loans

Common Student Loan Refund Mistakes

There are a few common pitfalls regarding private and federal student loan refunds that students and their parents should avoid. These include:

Moving Too Slow

Requesting a student loan refund is a bit of a time-sensitive process.

•   If someone realizes they won’t need the full amount of a federal student loan awarded before the funds are disbursed, they can actually request the school cancel the check or deposit before the need to process a refund even arises.

•   If the borrower realizes after distribution of a federal student loan that they don’t need all or any of the funds, they have 120 days after the loan disbursement date to return the funds without incurring interest or fees.

•   If a borrower misses both of these opportunities, the process of working with their school’s financial aid office to return the funds can become more complicated and time-consuming.

Not Establishing a Paper Trail

When making a student loan refund request, it may be a good idea to keep a paper trail of all requests and communication in order to establish a clear history of a desire to return the unused funds, if that is your situation. If things get lost in translation (which could happen), having a paper trail can be extremely helpful.

Overrelying on Student Loans

Some students and their parents might lean too heavily on student loans and may be able to get a bigger refund if they can find another way to finance any qualified education expenses. Student loans can be used to pay for academic and living expenses for the student while they’re in school.

However, pursuing other forms of financial support, such as a work-study program, can allow students to send more of their aid funds back, which will leave them with fewer loans when they graduate.

While it can be tempting to use a student loan refund to cover extra expenses like clothing and transportation — the less that is borrowed, the less that will be owed after graduation.

Just be sure that, if you receive a larger loan disbursement than what you actually need, you don’t wind up spending it on, say, dining out or entertainment while in school. While those activities are part of college life, paying for them with loan funds could be a misuse of your financial aid.

Recommended: What Happens If You Just Stop Paying Your Student Loans?

What to Do With a Student Loan Refund

When a student or their parents get a student loan refund, they have two main options. They can keep it or return it.

Keep the Student Loan Refund Check

The first option is to keep the refund. This money can be used as the borrower sees fit. Borrowers aren’t required to submit proof of what they spent the funds on which can make it tempting to spend the refund on expenses that aren’t necessarily required for education purposes.

Keep in mind, as noted above, that spending the funds on nonqualified expenses could be considered fraud and is not recommended. While it may feel appealing in the moment to use the funds, it may not be the wisest decision. Additionally, a student loan refund is still money that needs to be repaid with interest, so keeping that money may also not be in your best interest from a financial perspective either.

Return the Student Loan Refund Check

If the funds aren’t needed to pay for school, returning the refund check may be the most beneficial choice in the long run. Because, as mentioned, the money will have to be paid back (with interest) and spending it on unnecessary expenses can be quite a disservice to the borrower.

For details on returning your student loan refund check, contact the school’s financial aid office. If the borrower chooses to keep the student loan refund check or misses the deadline to return it, there are still some next steps available to them. One such option is to make a payment on their student loan balance.

Even though federal student loans don’t require payment until the student graduates, this can be one way to cut down student loan debt. The borrower can also use those funds for expenses in the next term and as a result, can choose to borrow less money for that term.


💡 Quick Tip: If you have student loans with variable rates, you may want to consider refinancing to secure a fixed rate in case rates rise. But if you’re willing to take a risk to potentially save on interest — and will be able to pay off your student loans quickly — you might consider a variable rate.

Refinancing Student Loans

Now, imagine that all your hard work has finally paid off. It’s time to cross that graduation stage. Once graduation day rolls around, students and their parents will begin to think about how they want to manage and pay off their student loan debt.

One option that can potentially lead to saving money on interest is to refinance student loans.

When someone refinances a student loan, they get a new private loan at a new interest rate and/or a new term. If a borrower initially had more than one student loan, refinancing leaves the borrower with only one monthly payment to make instead of multiple ones. The borrower might also qualify for a lower interest rate or choose a lower monthly payment for a longer term.

Keep in mind that if you refinance with an extended term, you may pay more interest over the life of the loan. Also know that if you refinance federal loans, you will forfeit federal benefits such as forgiveness and student loan deferment. For these reasons, refinancing may not be the right choice for all borrowers.

The Takeaway

If there are funds from student loans left over after all tuition and fees are paid, students may receive a student loan refund check. This check can be used to pay for other educational expenses, or it can be returned.

Keep in mind that unless the refund is returned, the money will need to be repaid with interest. Refinancing student loans can be an option for a borrower to explore when it’s time to start paying back what they have borrowed.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

Why did I receive a student loan refund check?

It’s likely that you received a student loan refund check because the amount you borrowed in student loans exceeded the expenses your college billed you for, including tuition and fees. You can check with your school’s financial aid office to find out exactly why you received the refund.

When should I expect my student loan refund check?

Typically, borrowers will get a student loan refund within 14 days after the financial aid office at their school has applied the loan funds to their qualified education expenses and then processed the credited amount. A check will likely take longer to receive than a refund that’s directly deposited in the borrower’s bank account.

How do I know if I got a student loan refund?

Your school should notify you that you are getting a student loan refund. You can also check your account on your school’s online portal — the information should be listed there. Finally, you can contact your school’s financial aid office directly and ask them whether you are getting a refund.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.