Personal loan vs. Line of Credit: Which is better to end cash problem during Coronavirus pandemic?

A line of credit gives you access to a pool of funds from which you can draw for any personal or business-related activities.

Personal Loan vs Line of Credit: The Coronavirus pandemic and the subsequent lockdown have badly hit the financial wellness and livelihood of working-class individuals and professionals. Job losses and pay-cuts by even some of the big companies in the market have become a harsh reality. The financial troubles are forcing many people to borrow money. However, Gaurav Chopra, CEO & Founder, IndiaLends told FE Online that in these circumstances when finances are stretched and assets are not easily accessible, it is important for individuals to examine their financing options — such as personal loan or line of credit — and plan accordingly for the weeks and months ahead.

The answer to personal loan vs line of credit question lies in understanding the difference between the two financial tools.

Chopra explained that a personal loan is a lump sum amount that you borrow from a bank or a financial institution and repay over a fixed period of time, usually through monthly instalments. “However, you have to pay interest on the entire amount irrespective of when or how you choose to utilise the funds. In the event you repay the loan and require additional funds, you have to reapply for a fresh loan.”

In contrast, a line of credit gives you access to a pool of funds from which you can draw for any personal or business-related activities. “A line of credit provides built-in flexibility on when and how much to borrow and how and when to repay. The big advantage here is that once you repay the amount, you have the option to withdraw or borrow funds again, and as many times as you need. Since consumers only pay for the funds they actually use, a line of credit can prove more affordable in the end,” he said.

Personal Loan Vs Line of Credit: Comparison

According to the IndiaLends CEO, qualifying for a line of Credit requires a higher credit score compared to that for a personal loan. If you obtain a loan that is too little to cover costs, you may end up borrowing again. This means you may face hurdles while applying for a new loan, which could have a negative impact on your credit score. A line of credit can also affect your score if you have high borrowing, as in the case of a high-interest credit card balance.

“While both personal loan and line of credit provide you with the required capital, both options have different uses. A line of credit is flexible and easy to use compared to a personal loan that is ideal for big-ticket purchases. If you are certain about your requirements in terms of the amount, purpose and repayment capacity, then a loan would be a better option,” he said.

Chopra said that unlike a loan, a line of credit helps compensate a temporary cash shortage. he concluded that in the present crisis, a line of credit would be the ideal choice as it gives you the flexibility to use the funds as and when the need arises (and pay only for what you use and when) without having to apply for multiple loans.

We are living in unprecedented times and while the government is doing its part to revive the economy, as evident from the Rs 20 lakh-crore ($266 billion) package announced on May 12, you should do yours by taking charge of your financial situation and securing your future. A personal loan or a line of credit will help you tide over a financial crisis. But before you opt for one or the other, ask yourself if you really need to borrow. Any loan should be taken only as a last resort. This is the first rule of a healthy financial plan.