What's a Personal Loan?

With a personal loan, you the consumer are borrowing a set amount of funds that is paid back within a set period of time (i.e. it has a set amortization period) and is paid in installments. A personal loan can literally be used for anything nowadays (many lenders even give out “vacation loans”), although the bank will likely want to know what you plan to use the loan for regardless.

What's a Line of Credit?

With a revolving line of credit, you have the opportunity to borrow how much you want, whenever the need may arise. Lines of credit are therefore much more flexible in this regard. Most consumers will want to use a revolving line of credit like a revolving door, borrowing and paying back what they need in a rotating fashion.

Which Option Is Better Suited for You?

The best way to decide whether you should apply for a personal loan or line of credit is by asking yourself what the loan will be used for.

If you plan to use a personal loan to pay off credit card debt and know that the exact amount you need to do so will be $25,000, you should take out a personal loan.

If you plan on financing business operations or another investment venture you will likely want to go with a revolving line of credit.

The reasoning here is simple. A revolving line of credit is more valuable for something like a business, because businesses can have unexpected expenses arise (inflow and outflow of inventor, etc.) and you may not want to always go through the hassle of financing costs as they arise, as opposed to having an available line of credit at your disposable.

Most Important Factors for Qualifying for a Personal Loan

Your debt to income ratio and credit worthiness will be the most important factor when looking to qualify for a personal loan. Your credit history is also an important factor to look at and some lenders may even look at your free cash flow (sometimes DTI is not enough, they will often want to see how much money you are spending on household expenses and things that aren’t often reported on your Debt to Income ratio).

What About If I Have Run of The Mill Credit?

Although people with “Fair” credit may be able to qualify for a personal loan, the terms are not going to be too good. It’s very likely you get an APR that is a similar to a standard purchase APR on a credit card (or worse) and it is also likely that you do not receive the full funding amount you requested.

Qualifying for Lines of Credit

All the same factors will be looked at by lenders when you apply for revolving line of credit. The main difference here is that if you have an established relationship with your bank you are likely to get much better terms on a line of credit. This is even more so apparent if you go to a local credit union (Mom & Pap credit unions are typically best). A long-standing relationship with your local bank is the best if you are on the borderline for qualifying. They're a lot more likely to hear you plea.

Credit Cards

Credit cards are also lines of credit, although they are more restrictive in how you can spend the funds. Although, the credit requirements for credit cards vary significantly, there are credit cards for consumers that have bad credit.

What Are The Requirements for Qualification?

To be realistic, you will want to have at least a 620-credit score or above to qualify for these two types of products. Even then, the repayment terms will not be great, to say the least.

DTI requirements: You typically will want a 35 to 40 DTI ratio in order to qualify for both options. If you don’t qualify via these measurements, it’s very likely you’ll have to go the secured route, if you want to receive funding you're looking for.

All in all, these are the key differences between personal loans and lines of credit. Each option works best for different things, so make sure you consider which goal you are working towards and what else you had in mind for the funds. With interest rates as high as they are, if you can avoid borrowing money altogether and bootstrap some cash, you would be all the better for it. However, since that isn't always feasible you can look towards these borrowing options for help.