What do you do when you have a situation that requires money you don’t have?
A recent survey found that 40% of Americans cannot afford an emergency that costs a few hundred dollars.
When you suddenly find yourself needing money, you want to understand the basics of your options and define precisely why you need it and for what.
For example, what’s the difference between a loan vs. line of credit? How are the two similar and different? When should I use one instead of the other?
Both lines of credit and personal loans can benefit you when you’re in a pinch.
What is a Personal Line of Credit?
Personal lines of credit function similar to a credit card, but without the plastic.
Intrest rates are varied and based on one’s credit score. If your request is approved, you’re issued the maximum amount you can spend, and when you need funds, you transfer the money to your bank account via online banking or line-of-credit checks.
You can borrow as much money as you desire as long as it does not exceed your limit. For example, you cannot borrow $1000 on a $900 line of credit.
You are charged interest only on the money you use and may withdraw the full amount if you need to. Occasionally interest rates on personal lines of credit are lower when compared to personal loans.
Your payments are based on how much you’ve borrowed against your loan and the terms agreed upon at the onset of your line of credit. This means payments can vary from month to month.
Personal lines of credit can be secured or unsecured. The borrower may need a credit score around 700. But there are no annual fees for a personal line of credit.
Uses for a personal line of credit sometimes include:
- being prepared for emergencies
- protection from overdraft fees
- home improvement tasks
You can obtain a personal loan without collateral in most cases, but if you want to secure a lower interest rate, consult your lender.
What is a Personal Loan?
About 34% of Americans take out personal loans.
Personal loans are best when you need a large significant amount of money quickly. Your lender issues your loan.
Instead of paying for what you spend, like a personal line of credit, you make payments to the full loan based on your agreement with your lender. Most payments are predictable and have a fixed interest rate (though some interest rates can vary). Intrest rates can be across the board with the highest rates being in the upper 30s.
The life of the loan can be anywhere between 1-7 years. This differs personal line of credit, in which you pay back only what you spend.
The loan amount can be in the low thousands (or lower) or significantly higher.
There are no annual fees attached to a personal loan.
Common uses for personal loans include:
- debt consolidation
- fund large purchases
- student loans
These three areas are not the only uses for personal loans.
Personal Loan for the Self-Employed
When you’re self-employed, maintaining a steady income can be challenging. You may need a loan for a car or for business purposes.
Obtaining a personal loan can be tricky, as lenders consider lack of steady income when those that are self-employed apply for a personal loan.
If your thinking about taking out a personal loan and are self-employed, these steps might ease the process:
- check your credit score, and make necessary improvements
- reduce or pay off your debt
- have a steady stream of income with your business for a few years before applying
- have a savings account
- be able to offer a down payment
If you’re considering a personal loan vs. a business loan, here are some things to remember:
- Business loans are often trickier to get approved. Lenders consider a host of information such as personal credit history, reviewing your business plan, business statements and possibly more. The persnicketiness of the process is slightly off-putting for some.
- Given all the above requirements, waiting for approval could be lengthy. Personal loans often have a quicker response.
- A business loan may include collateral.
In short, it’s a process, and you need to consider all of the possible factors.
Personal Loan for the Uber Driver
If you’re considering working for Uber as a side-hustle and need a car, a personal loan can help.
A brand new car for Uber isn’t necessary. As long as the vehicle is less than eight years old, you’re good to go. Finding a car this age with low mileage is doable in a reasonable price range.
Personal Loans with Collateral
Most personal loans do not require you to have collateral, although if you want to, speaking with your lender about your options. Putting up collateral, in some cases, can get you a lower interest rate.
Personal loans can have collateral based on a secure or unsecured loan.
Personal Loans With a Cosigner
You can still acquire a personal loan with a not-so-great credit score by bringing in a cosigner.
If the cosigner has a higher credit score than you, you have a better chance of securing a loan.
A word to the wise: if you miss a payment, you can damage their credit and yours. In addition, the relationship between the borrower and the cosigner could become strained if the payments are mismanaged.
Personal Loans to Consolidate Debt
By far one of the top ways to use a personal loan is to consolidate debt, typically credit card debt or medical bills.
When you consolidate your debt with a personal loan, you’re no longer juggling many payments and interest rates.
This allows you to pay off your loan quickly, save money, and increase your credit score.
Loan vs. Line of Credit: Where Do You Find Either?
Have you weighed a loan vs. line of credit? Ready to take the next steps?
Bonsai Finance is a one-stop shop for all things financial. Bonsai Finance aims to assist you in improving your finances. Their lenders help you analyze your situation and can help you find a great solution.
Contact them today and be on your way to peace of mind.