The difference between a fixed-rate loan and a credit line loan is that a fixed-rate loan provides the borrower with a set amount of cash for one-time use and a line of credit is a revolving amount of money the borrower can use and repay repeatedly up to a certain amount.
But what exactly do we mean by a “fixed-rate” loan? Fixed-rate refers to the interest rate of a loan. It means that the interest rate will stay the same during the entire repayment period of the loan. An interest rate can either be fixed or variable-rate. A Variable rate is one that may go up or down throughout the loan based on the benchmark rate used by large banks.
Regardless of whether your loan has a fixed or variable interest rate, it functions the same way. The borrower applies for a loan, and the lender either approves or denies the application. If approved, the borrower will receive a set amount of money determined by the lender. They will then have a certain amount of time to repay the loan through monthly payments. Once it’s paid off, the loan contract ends and the process is complete.
A line of credit works a bit differently. The application process is similar, as you would still need to apply and be approved. Once approved, the lender would then open a credit line for you and give you access to it. This means you have a set amount of money that you can pull from when needed. You don’t have to use the entire amount available to you, but you can. You can then repay whatever you use, and have the full amount available to you again. This is similar to a credit card, as you can use this money repeatedly.
Whether you choose a loan or line of credit will depend entirely on your specific financial situation and your current needs. Lines of credit are more commonly used by businesses or for home costs, like a home equity line of credit (HELOC). If you only need a set amount of money for one-time use, then a personal loan may be a good option.
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