Line of Credit vs Loan and Home Equity: what is the different

Do you want to know the difference between Line of Credit versus Loan and Home equity loan because When it comes to borrowing needs – there’s no one size that fits all.

A loan,Home equity loan and line of credit are ways to borrow money and pay it back over time.Whether you want to make a major purchase, buy a new car, renovate your home, borrow to invest or consolidate debt, you need to Find the Right Borrowing Solution that meet your needs and budget

 

What are Loans?

Loans are a popular way to borrow a specific amount of money if you’re looking to make a big purchase, renovate your home, or consolidate existing debt. You will be able to select a repayment schedule that allows you to pay off the principal amount plus interest on this principal amount over an agreed-upon period of time.

A loan is a sum of money that you borrow from a financial institution — a bank, credit union or online lender — or a person, like a family member, and pay back in full at a later date, typically with interest.

Loans can be given to individuals, corporations, and governments. The main idea behind taking out one is to get funds to grow one’s overall money supply. The interest and fees serve as sources of revenue for the lender.

A loan is granted as a lump sum for one-time use, so the credit advance can’t be used over and over again like a credit card. The most common types of loans include auto loans, home mortgage loans, personal loans and student loans.

Loan could either be Secured or unsecured: Secured loans are backed by your collateral either by property or investments, resulting in a higher borrowing amount and lower interest rate, whereas with unsecured loans they typically have a faster approval process. Learn more about secured and unsecured personal loans.

Also read: What is difference Between A Credit Card and Debit Card

What is Line Of Credit?

Line of Credit saves you money and time, and helps you easily manage your credit. It’s a flexible way to borrow, and can be a great option for home renovations, education, paying off higher interest debt, and more.

A line of credit is a borrowing option where you apply only once for a credit limit that you can continue to use and re-use based on your credit needs. You are charged interest only on the amount that you use

If your borrowing needs vary, and you want to make on-going purchases, a personal line of credit is probably a better fit.

Line of Credit i available from many banks and credit unions. You’ll pay interest only when you borrow on the line of credit. Once you pay back borrowed funds, that amount is again available for you to borrow.

lines of credit are usually unsecured, meaning you don’t need to use collateral to take out the line of credit. Secured lines of credit are backed by collateral, such as your house or a savings account.

Read: How to apply for capital one credit card and get approval

What is Home Equity Line of Credit?

A home equity line of credit — HELOC — is a loan secured by the equity in your house: that is, your home’s value minus its outstanding mortgage balance.A HELOC has a credit limit and a specified borrowing period, which is typically 10 years. During that time, you can tap into your line of credit to withdraw money (up to your credit limit) when you need it. You use the funds only when you need to, and you can continue to use the funds as you repay them.

Once the borrowing period ends, you’ll repay the remaining balance on your HELOC, with interest, just like a regular loan. The repayment period is usually 10 or 20 years.

During the borrowing period, you’ll need to make at least minimum monthly payments on the amount you owe. Some HELOCs allow interest-only payments during the borrowing period. Other HELOCs require minimum payments of principal and interest.

Home equity lines of credit (HELOCs) and home equity loans (HELOANs) are two ways to achieve similar ends. But they are different, and understanding how each one works can help you decide whether one or the other might work for you.

Also read: Chase Credit Card: How to apply and get approval fast

What is a home equity loan?

A home equity loan is more like the original home mortgage. You borrow a specific amount, and then you make regular payments during a fixed repayment period. With a home equity loan, you apply for the amount you need.

Most charge a fixed interest rate that doesn’t change during the life of the loan. Each payment, the same every month (if it is a fixed-rate HELOAN), includes interest charges and a portion of the loan principal.

Read: How to apply for Lloyds Bank Personal & business loan and requirements

When to use a line of credit and Loan

1.If you need to renovate your home, borrow to invest or consolidate debt, out major expenses, a HELOC or secured line of credit may be a good idea — as long as you know you’ll have the money for repayment. Bonus: The interest you pay on the HELOC may be tax-deductible.

2. Loans are best for large, one-time purchases of a new car or home which are one-time expenses where the flexibility of a line of credit doesn’t matter.

3. Loans and lines of credit are considered different types of credit, so responsibly managing both can help your credit score

4.  line of credit is considered a revolving account: borrowers can borrow and pay it off again and again without applying for a new loan

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