Personal Loans Vs. Lines of Credit

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Difference between Personal Loans and Lines of Credit

For you to be effective in managing your personal debts and loans, it is necessary to understand different terminologies and options for you to benefit from any of these services. Personal loans apply where you might be interested in large one-time purchases for a fixed or variable interest. There are two types: unsecured personal loan and secured one. The disbursement here comes in a lump sum, and there is a minimum amount to borrow.

Personal lines of credit on the other hand, involve on-going purchases. The line of credit remains re-usable where you can access any part of the line anytime on approval. The interest rates are also variable depending on credit card score and other factors. The advantage of lines of credit is that you get to pay interest on the amount you put into use rather than the whole amount you borrowed.

Understanding Debt Consolidation

You can manage your personal loans through credit card consolidation which is the same as debt consolidation. Personal loans taken from your bank or your credit union may have lower interest rates, so if you have good credit score, it is upon you to choose the best personal loan in terms of interest rates and payment options. Your credit score is determined by how late or early you pay your debts. It is important to have proper credit for the lowest interest rates on personal loans.

Difference between a Good Debt and a Bad Debt

Most loans are taken for self-help while others are made to be useful financial tools to help you address unexpected expenses without having to sell out property. Low-interest loans can help you achieve long-term financial prospects. However, there are many differences between good and bad debts. Good debts are tax advantaged and are beneficial like mortgages, business loans while bad debts invoke high-interest credit cards thus draining you financially. How you manage and classify your debts within the two constraints will determine what end you are likely to fall in.

Bank Loans and Private Lender Loans

bank loanMost entrepreneurs opt for bank loans compared to lender loans. The borrowing trend gets attributed to lower interest rates offered compared to lender loans. What makes banks the best alternative is that they have access to funds both from depositors and federal banks, unlike private lenders. It is also important to understand that private lenders get their funds from the same banks at a higher rate. These lenders have to add their maintenance rates plus the bank rates to stay in business. Their interest rates are relatively high to maintain the chain of supply and demand.

A few things to note are that banks manage many enterprises that generate revenue and are not obliged to fund your business loans. Their regulations are also pretty stiff as they require very high credit scores and the likes. These same banks have additional charges not included in the interest rate resulting in high costs to the borrower.

Private lenders become the better alternative as they do not have very strict stipulations or other ways to earn their income. As much as bank loans might be better, they are hard to get, but that does not give you the solution of opting out. As long as your business potential is valid, you can work with private lenders to fund your business until you qualify to get a bank loan.