Line of Credit Loan vs Fixed Short Term Personal Loans

Fixed short term personal loans and  line of credit loans are your two best choices for unsecured personal loans. Consider the following when choosing the right financial product for your situation.

Comparing Costs

Compare the annual percentage rates (APRs) of short term personal loans and line of credit loans. APR calculations average application fees, annual fees and interest payments on an annual basis over the loan term. For borrowers with the best credit scores, a short term fixed personal loan usually has the lowest APR by one to three percentage points.  Line of credit loans may also have variable interest rates which adjust as often as monthly and can skew the effective average rates.

This does not mean that short term fixed personal loans are always the best option. In many situations the line of credit loan is a better fit.

Short Term vs Long Term

Fixed short term personal loans have a set repayment schedule that cannot be altered without the bank's permission. If you miss a payment, it will negatively impact your credit score and may result in acceleration of the loan.

Line of credit loans have minimum payment requirements that can be interest only. This gives the borrower flexibility to pay more or less each month, and those with good payment histories may even be offered the chance to skip a month's payment (with interest accruing to principal). However, skipping payments or paying only the minimum will cause future minimum payments to rise, as well as increasing the APR of the loan.

Thinking short term, line of credit loans often have prepayment penalties of several hundred dollars if closed too soon. For terms of less than three years, fixed short term personal loan may be a better choice.

One Loan vs Several

A fixed short term personal loan is a better option when you are sure that the amount of money needed will not exceed what is borrowed. You will owe as little as possible, pay less in interest costs and ensure level monthly payments.

When the exact amount needed is unknown, or when smaller amounts need to be borrowed over a period stretching several months or years, line of credit loans may be a better option. This spares the borrower from having to qualify for credit-damaging concurrent loans.

Emergency Funds

Many banks can deposit funds from a short term personal loan into your account within 48 hours of approval. If you have that kind of time and can qualify for it, go for the short term personal loan because it typically has the lower interest rate. Keeping an active line of credit loan may be a better idea if you want to hedge against loss of income or to have an backup to your emergency cash reserves.

How Much Money is Needed
Short term personal loans rarely come in amounts less than $1000. It may be necessary to open a line of credit loan for a higher amount. Above the $1000 mark, either type of loan is suitable. Assessing the other facets of your situation will help you figure out which loan is better.

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