What’s best for you: a personal line of credit or personal loan?
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If you’re on a fixed retirement income, with no emergency savings, loans can be the only way to afford large expenses like buying a new car, retrofitting renovations or new appliances.
When looking at loan options, many people consider a personal line of credit or personal loan. We will take a look at the pros and cons of each, so you can better decide which is right for you, or if there might be a better, less expensive option.
Advantages of a personal line of credit
Flexibility: you can draw from it at any time, for any reason and only start paying interest when you borrow money.
Convenience: you can draw from it at any time, for any reason and only start paying interest when you borrow money. You can usually withdraw funds using cheques, ATMs or by transferring funds.
Easy repayment options: you can draw from it at any time, for any reason and only start paying interest when you borrow money. You only need to pay back the minimum monthly amount, which is the interest charged. You can pay off the principal at any time, depending on your cash flow situation.
Good for consolidating debt: reduce the amount of interest you’re currently paying and take longer to pay off debt.
Cheaper than credit cards: you can draw from it at any time, for any reason and only start paying interest when you borrow money. Interest rates are usually considerably lower for a personal line of credit compared to a credit card.
Drawbacks of personal lines of credit
Easy to rack up debt: because of its convenience, you can quickly accumulate debt.
Monthly payments can fluctuate: because your interest rate is linked to the lender’s prime rate, your monthly payment can rise or fall with little notice, making budgeting tricky. Depending on your personal financial situation and credit score, interest rates can be much higher than some other loan options (e.g. loans secured against your property).
Hard to qualify: lenders look at your income, credit score and outstanding debts. Some people on a fixed income find it difficult to qualify. If your circumstances change and you miss some payments, your lender can insist that you pay off the loan in full.
Now that we have covered the pros and cons of personal lines of credit, let’s turn our attention to personal loans.
The pros of personal loans
Regular monthly payments: most personal loans have consistent monthly payments you make over a fixed period of time.
Scheduled debt payment: once the loan period is over, the debt is completely paid off.
Interest rates: when comparing a personal loan and a line of credit, depending on your personal financial situation and lender, loans can have considerably lower rates.
The cons of personal loans
Rigid repayment terms: you must pay the monthly payment. There is no flexibility like a line of credit offers.
Interest charged immediately: unlike lines of credit, where you only pay interest on what you owe, interest is charged on the full amount you borrow, whether you need it all at once or not.
Hard to qualify: as with personal lines of credit, you qualify based on income, credit score and other debts — a tough process for some people on a fixed retirement income.
Higher interest than other options: interest rates can go as high as 14%, which is considerably higher than some interest rates on loans secured against property. As with the line of credit, if your circumstances change and you miss some payments, your lender can call in the loan.
An alternative to a personal line of credit or personal loan
If you can’t qualify for the loan or line of credit you need, or struggle making monthly payments, a CHIP Reverse Mortgage® is a great alternative.
You borrow on the equity of your home and don’t have to make regular mortgage payments, so your disposable income stays the same. You can receive it in a lump sum or regular amounts over time.
Plus, you save money because interest rates are considerably lower than most personal loans or lines of credit and typically less than a third of what you would pay on credit cards.
Find out how the CHIP Reverse Mortgage® could be a better alternative to a personal line of credit or personal loan for you. Call 1-866-522-2447 to learn more.