Difference Between Loan of Credit and Line of Credit

Loan of Credit vs Line of Credit

In today’s uncertain economy, the terms ‘loan of credit’ and ‘line of credit’ are thrown around quite a bit, but most people are a bit fuzzy about the differences between the two. In order to fully explain each term, this article will use the examples of a home equity loan of credit, and a home equity line of credit. Though both examples basically entail taking out another mortgage on a home, there are distinct differences.

With a home equity loan of credit, the bank gives you a simple clump of money, and you have to make fixed payments on that sum every month, for a set amount of time. With a home equity line of credit, you are able to extract funds (up to a set limit) whenever you need to; this is basically like a credit card that lets you spend money at your will. Also like a credit card, a home equity line of credit usually has just a minimum payment that is due every month, but it does allows you to pay off as much of the balance as you desire. The total amount of money available to you in both a home equity loan of credit and a home equity line of credit depends on numerous factors, including your credit history, debt, total income, and of course, the value of your home.

Both a home equity loan of credit and a home equity line of credit have quite a few benefits. The interest rates on both kinds of credit are usually quite low. Moreover, interest payments for home equity loans and lines of credit are usually tax deductible as well.

So, do you need a home equity loan of credit or a home equity line of credit? Usually, a home equity line of credit is sufficient, because it enables you to meet ongoing cash needs without going too far into debt. However, at times when a substantial amount of money is needed for a one-time purpose, a home equity loan of credit is the more logical choice. A financial advisor at your bank can help you decide which option is right for you. When speaking to your financial advisor, make sure to discuss the different types of interest rates, and the various types of credits available for you to carry. Some home equity loans of credit and lines of credit carry interest rates that fluctuate, which can cost you a lot in the future.

In summary, a loan of credit and a line of credit have various facets:

1. A loan of credit is a single lump sum borrowed against collateral, on which you must make fixed monthly payments, for a set amount of time.
2. A line of credit allows you to take money out against collateral as you need it, and only has a minimum monthly payment due (though you can pay more than that minimum if you desire).

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