Personal Loan vs. Line Of Credit: Interest Rates & Requirements
Personal loans are short-term loans that you can take when you are facing cash flow issues. But you can also withdraw quick cash from a line of credit. So, what exactly are the differences between these two banking products?
Personal Loan VS Line of Credit: What's the Difference?
Personal loans and lines of credit are both advertised to give you quick cash. How do you differentiate between the two, and which one should you get for your situation?
Key Differences Between Personal Loans and Line Of Credit
Most personal loans and lines of credit are advertised to give you quick cash, but how do you differentiate between the two, and which one is more suitable for your situation?
Hereâs a quick look at the key differences between the two to help you make a better decision.
Hereâs a quick look at the key differences between the two to help you make a better decision.
Definition of personal loan
A personal loan is a flexible type of loan that you can take out when you are facing a situational cashflow issue with a fixed interest rate and a fixed loan term of up to 5 years.
Personal loans are "term loans" that are amortised, meaning that during the repayment period, the ratio of principal to interest adjusts such that you pay the same amount over a fixed number of months. For instance, if you borrow $10,000 via a personal loan with a 3.88% interest rate (7.56% effective interest rate) over 5 years, you will repay $199 every month.
Line of credit meaning
As for line of credit, the amount that you can withdraw is dynamic, as long as it is under the credit limit. It is a "revolving loan", where interest charges accumulate daily. A credit card is a unique example of a line of credit, because as long as you pay your balance in full every month, you need not pay credit interest.
Unlike a personal loan, the loan term is open-ended and not fixed, and the interest rate can also vary. For personal loans, you pay a one-time processing fee while for a line of credit, there is an ongoing annual fee that renews yearly.
Comparison of Personal Loans vs. Line Of Credit
| Personal loan | Personal line of credit | |
|---|---|---|
| Popular types available in the market | Personal loan
| Personal line of credit
|
| Interest rates | Personal loanFixed, between 2.87% to 5.43% (excluding EIR - effective interest rates) | Personal line of creditNegotiable and tailored to the debtorâs financial capability, between 9% p.a. to 32.9% p.a. |
| Repayment and loan terms | Personal loanFixed monthly repayment amount for up to 7 years | Personal line of creditOpen-ended negotiable daily or monthly or yearly repayment amount, open-ended |
| Processing fees | Personal loanOne-time fee between $0 to $250. | Personal line of creditOngoing annual fee that renews yearly, ranging from $60 to $120 |
| Early repayment penalty | Personal loanYes | Personal line of creditNone |
| Suitability of loan purposes | Personal loanOne-time expenses or debt consolidation | Personal line of creditOngoing or uncertain costs |
*All figures and data above are accurate as of 22 March 2024 as per the respective banksâ interest rates, fees and loan terms listed on MoneySmartâs Personal Loans listing page.
How Do I Qualify For A Personal Loan Or Line Of Credit?
There are several important aspects to consider when it comes to qualifying for a personal loan or line of credit in Singapore.
Minimum annual income
Banks and licensed money lenders have minimum annual income requirements. These can range from S$30,000 to S$40,000 depending on your citizenship and employment status.
Employment history
Lenders prefer applicants with a stable employment history and a good track record, thus it helps if you have been employed for long periods of time.
Debt-to-income ratio (DTI)
This ratio compares your total monthly debt obligations to your gross monthly income. A lower DTI improves your chances of getting approved and getting a favorable interest rate.
Credit score
Having a good credit score shows lenders you are a responsible borrower and are likely to repay your loan on time and the chances of qualifying for a personal loan or line of credit may be much higher.
Citizenship
Singapore Citizens and Permanent Residents (PRs) generally have access to better interest rates and loan terms compared to foreigners.
Loan amount and purpose
The loan amount you are applying for and the purpose of the loan can also affect your eligibility. Some lenders may offer lower rates for specific purposes like debt consolidation.
Should I Get A Personal Loan Or Line Of Credit?
There are actually more options than just these 2 unsecured loans (personal loan and line of credit). If youâve looked at our article on âWhat Exactly Is An Unsecured Loan?â, it would probably widen your range of options as you consider which type of loan may be most suitable for you and your current and near-future needs.
Choosing the right unsecured loan often depends on your specific needs and financial situation:
Choosing the right unsecured loan often depends on your specific needs and financial situation:
- Consider a personal loan for a specific goal with a clear repayment plan.
- Opt for a credit card installment plan for big-ticket items if you already have a credit card.
- Choose a balance transfer to save on interest on existing high-interest credit card debt.
- Get a line of credit for ongoing or unexpected expenses.
- Consider a debt consolidation plan to simplify repayments and potentially save on interest if you have multiple high-interest debts.
Frequently Asked Questions
Is it hard to get a line of credit?
- As long as you meet the eligibility conditions of the bank, it isnât hard to get a line of credit. If you are a cardholder, you'd even get calls from the bank encouraging you to do so. But, don't do it unless absolutely necessary.
Is it a good idea to get a personal loan?
- The question doesn't have a black-and-white answer. The best recommendation we can give is that it is okay to get a personal loan as a last resort. Of course, it is better to exercise prudence on your day-to-day expenditure such that you have reserve funds and don't ever need a personal loan. However, there may be situations where you suddenly require a large amount of cash and a personal loan can tide you over. If you have chalked up credit card debt, a personal loan is definitely a good idea as it has lower interest rates than credit cards. Take note that taking on many personal loans with no clear plan of repayment can hurt your credit rating in the long run.
What does the effective interest rate mean?
- The effective interest rate takes into account the nominal interest rates and the compounding frequency of the loan. This is why two different personal loans with the same interest rate can have different effective interest rates. When comparing, use the EIR as it provides a more accurate picture of how much interest you are actually paying.
