Personal Loan vs Personal Line of Credit

When comparing a personal loan vs. 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 a personal line of credit vs. personal loan and how to decide which option might be right for you.

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

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

A PLOC 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 Any funds that are withdrawn are subject to repayment with interest.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.

Note: SoFi doesn’t offer unsecured personal lines of credit at this time. However, we do offer personal loans and home equity lines of credit.

Additional points to know:

•   Some lenders may assess fees associated with a PLOC. There may be a maintenance charge for inactive accounts. There may also be ongoing fees, monthly or annual, even if the PLOC is being used. Additional expenses may include application fees, check processing fees, and late fees, among others. It’s important to be aware of potential fees before you sign a PLOC 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. In this case, the collateral is the equity you have built up in your home.

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

•   If your line of credit 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 PLOC 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 PLOC 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 lower 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 a personal line of credit.

Pros of Personal Lines of Credit

•   Easy access to funds.

•   Open-ended vs. one-time 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 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.

How Personal Loans and Lines of Credit Are Similar

Both a personal loan and a PLOC are typically unsecured, so borrowers aren’t putting an asset at risk if they use this form of financing. Both borrowing methods also involve paying interest and, in some cases, fees. And, as noted above, the application process for a personal loan vs personal line of credit is similar and involves a hard credit check.

Of course, to truly weigh the options you’ll want to understand what a personal loan is and how it works.

What Is a Personal Loan and How Does It Work?

A personal loan 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 loan interest rates are typically lower than rates for 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 with a credit card consolidation loan.

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. 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. An unsecured personal loan is guaranteed only by the borrower’s signature, which is why it’s sometimes called a signature loan.

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. Other personal loan requirements may include steady income and a healthy balance of debt vs. income. Applicants who struggle with a limited credit history or erratic income can consider applying for a personal loan with a co-borrower.

•   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 a personal line of credit vs. personal loan:

Personal Line of Credit	Personal Loan
Typically has a fixed interest rate	More likely to have a variable interest rate
Fixed interest rate may make it easier to budget payments	Variable interest rate may present a budgeting challenge
Fixed, lump sum	Open-ended credit, up to approved limit
Interest is charged during entire loan term	Interest is charged only on withdrawn amounts
Revolving debt	Installment debt

Considering the Type of Debt

When you’re thinking about applying for a personal loan vs. line of credit, 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 line of credit 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.

Recommended: How Hard is it to Get a Personal Loan?

PLOC or Personal Loan: Which Is Right for You?

Before you decide to obtain a personal loan vs line of credit, 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.

Alternatives to Personal Loans and Lines of Credit

If you examine the difference between personal loan and line of credit and decide that neither feels like the right fit, you could consider these alternatives:

•   Credit card A credit card offers flexible access to funds to pay for bills as they come. Unfortunately, credit card interest rates tend to be higher than those for personal loans. If you can find a credit card that has a low (or 0%) initial APR offer and you can be sure you’ll pay your balance off before the initial offer ends, that could be a cost-efficient alternative to a PLOC or personal loan.

•   Home equity loan or home equity line of credit (HELOC) If you own your home and have some equity built up, you might be able to borrow against that equity with a home equity loan or HELOC. These options tend to have lower interest rates than either personal loans or personal lines of credit. The tradeoff is that they are secured by your home equity, so if you can’t repay what you borrow, with interest, you risk foreclosure.

•   Borrow from a friend or family member This type of loan does have some advantages: It likely won’t require a credit check, and you might have a low interest rate and very flexible repayment terms. But if you don’t repay the loan as promised, a personal relationship is at stake.

•   Retirement plan loan If you’ve stowed away money in a 401k, 403(b), or 457(b) retirement plan, you may be able to borrow up to $50,000 or 50% of your balance, whichever is less. You have five years to repay your loan and will need to make quarterly payments (rules are different if you use the money to buy a home). IRS guidelines govern this type of loan, so consult your tax advisor to ensure you follow the rules.

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.

SoFi’s Personal Loan was named a NerdWallet 2026 winner for Best Personal Loan for Large Loan Amounts.

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. That is the key difference between personal loan and line of credit to be aware of when making your decision, but it’s not the only one: 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.

What is the typical borrowing limit for a personal line of credit vs personal loan?

Generally speaking, a personal line of credit will have a lower borrowing limit than a personal loan. Some personal loan lenders allow loans of up to $50,000 or even $100,000. A PLOC might top out at $20,000. However, remember that if you borrow with a personal line of credit and then repay what you have borrowed, you can borrow again up to the limit so long as you are still in the borrowing phase of the agreement.

Can you have a personal loan and a personal line of credit at the same time?

It is sometimes possible to have a personal loan and a personal line of credit at the same time. When qualifying applicants for either of these borrowing methods, lenders consider the credit score but also the debt-to-income ratio — the level of debt relative to income. If overall debt remains healthy, a loan and line of credit can coexist. For example, if an applicant with a healthy income is making on-time payments on a modest personal loan and then wishes to add on a personal line of credit, the math could work out in their favor.

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