You won’t always have enough savings to cover an unexpected expense. Your car can break down, or you must see the doctor when your budget isn’t prepared. Borrowing money online with a line of credit and a personal loan are two of your options. Which one will you choose?
What is a Line of Credit?
A line of credit is a revolving financial product. This means you’ll be able to borrow money up to a maximum monthly limit on a repeated basis.
You can dip into these funds as sporadically as you need. While some people use their line of credit for several small purchases, others might use their entire limit on a big expense.
Your usage reflects what you pay in a monthly balance. Every purchase you put on your account will tie up your limit until you pay it off.
Most lenders will require a minimum monthly payment to keep your account in good standing.
However, the line of credit experts at MoneyKey recommend you should pay your full balance off whenever possible to free up your limit for the next emergency. This strategy may also help you save money, as most lenders apply finance charges to any balance you don’t pay off.
The Benefits of Using a Line of Credit
Here are some of the reasons why someone might use a line of credit in an emergency:
A line of credit is a convenient option that gives you the freedom of how and when to use it. Remember, finance charges usually only apply to the balance you carry over, so you won’t be charged if you don’t use it.
It’s a Long-Term Option
As a revolving product, you can borrow money repeatedly up to your limit without reapplying. You just have to keep your account in good standing and pay off your balance to keep your limit available.
This borrowing technique is convenient if you suspect unexpected car trouble that will take a few trips to the mechanic to fix. Alternatively, you might just like having it in your back pocket for a future issue.
What is a Personal Loan?
A personal loan is a fixed financial product that gives you a set amount of funds due back by a predetermined date. Finance charges and interest begin accruing as soon as you receive your loan, and these fees will factor into your fixed monthly payments.
While the cost of a line of credit reflects your monthly usage, a personal loan’s costs are set in stone. You’ll know how much your monthly payments will cost when you first sign your contract.
The Benefits of a Personal Loan
Find out why someone might use a personal loan in an emergency:
A personal loan comes with a fixed amount, term, and rate, so you’ll always know how much you owe each month. This might make it easier to fit into your budget, especially if you don’t have a lot of wiggle room.
It Has an End Date
Once you pay off your loan, the account closes. The only way to get more money is by reapplying and asking for another loan.
This might be the better option if you’re worried about the temptation to spend with an open line of credit. Many borrowers also choose a fixed personal loan when they know they have one unexpected expense.
Which Will You Choose?
While both options give you a way to handle your financial emergency, they work in different ways. Make sure you weigh your options before you borrow one over the other.