Loans vs. Lines of Credit

When you need access to money—whether it's for a home renovation, starting a business, or covering an unexpected expense—there are many borrowing options available.

Two of the most common options are loans and lines of credit. While they might seem similar at first glance, they function quite differently and are best suited for different financial needs.

Understanding the key differences between the two can help you make a smarter borrowing decision and avoid costly mistakes.

What Is a Loan?

A loan is a lump sum of money borrowed from a lender that you agree to repay over a set period of time, with interest. Loans are often used for specific purposes—such as buying a car, financing a home, or consolidating debt.

Key Features of Loans:

Fixed amount: You borrow a set amount up front.

Set repayment schedule: Typically monthly payments over a defined term (e.g., 3 years, 30 years).

Fixed or variable interest: Many loans have fixed interest rates, meaning your monthly payment stays the same.

Best for one-time expenses: Ideal when you know exactly how much you need.

Common Types of Loans:

• Personal loans
• Auto loans
• Mortgage loans
• Home Equity Loans
• Student loans

What Is a Line of Credit?

A line of credit (LOC) is a flexible borrowing option that gives you access to a set credit limit, which you can borrow from as needed. You only pay interest on the amount you use—not the entire credit line.

Think of it like a credit card: you can borrow, repay, and borrow again, as long as you stay within your limit and meet the terms.

Key Features of Lines of Credit:

Revolving access: You can borrow and repay funds repeatedly.

Variable payments: Payments may change based on how much you borrow and the current interest rate.

Interest only on what you use: No charges unless you draw from the credit line.

Great for ongoing or unpredictable expenses: Like home repairs, cash flow gaps, or emergencies.

Common Types of Lines of Credit:

• Personal lines of credit
• Home equity lines of credit (HELOCs)
• Business lines of credit

Which One Is Right for You?

Here’s how to decide:

A Loan May Be Best If:

• You have a large, specific expense (e.g., buying a car, debt consolidation).
• You want predictable monthly payments.
• You prefer a clear payoff timeline.

A Line of Credit May Be Best If:

• You need access to funds over time or on an as-needed basis.
• Your expenses are unpredictable (e.g., medical bills, home improvements).
• You want the flexibility to borrow, repay, and borrow again.

Both loans and lines of credit can be powerful tools when used wisely—but they serve different purposes. A loan is like a one-time financial boost, while a line of credit is more like a reusable safety net. Knowing how each works can help you borrow smarter, stay in control of your finances, and choose the option that best supports your short- or long-term goals.

Need help figuring out which option fits your situation? Talk to an expert at your bank to explore what works best for you.