Everything You Need To Know About Personal Loans Vs. Personal Lines Of Credit
Ever considered borrowing money for a big event or a home project? You might have heard about Personal Loans vs. Personal Lines of Credit, but understanding the differences between them can be a game-changer.
While both are great options to borrow money from financial institutions and banks, they have major differences in areas like qualification and eligibility requirements. Learning more about Personal Loans vs. Personal Lines of Credit will enable you to decide which option best suits your financial needs.
Here at OMY Singapore, you will discover the following:
Personal Loans Vs. Personal Lines of Credit: Explained
The first step in choosing between a personal loans vs personal lines of credit is understanding what each option entails.
This type of loan is a lump-sum amount of money borrowed from a bank or financial institution, which is paid back over a set period of time, usually with fixed interest rates. Personal loans are great for big-ticket items like a wedding, home renovations, or even consolidating debt. They are often unsecured so no collateral is required. However, banks may require a good credit score and income to ensure repayments can be made.
Typically, personal loans will let you borrow two to six times (sometimes up to 12x) of your monthly income, depending on your debt to income ratio.
Personal Line of Credit
A personal line of credit, on the other hand, is a flexible borrowing option that allows you to borrow money as and when you need it, up to a set limit. It works like a credit card, where you only pay interest on the amount you borrow, not the entire credit limit.
Personal lines of credit usually have variable interest rates, which can fluctuate based on market conditions. They also require a good credit history and income to qualify but often offer higher credit limits than personal loans.
The credit limit for personal lines of credit is often calculated based on an individual’s monthly salary. Financial institutions commonly offer credit limits ranging from 4x (most common) to 8x an individual’s monthly salary.
Personal Loans vs. Personal Lines of Credit: Eligibility Criteria
Those seeking personal financial assistance through a personal loan or line of credit must meet specific eligibility criteria set by banks and financial institutions. These criteria vary between Singaporeans, Permanent Residents (PRs), and foreigners.
To qualify for a personal loan, applicants need to be within the age range of 21 to 65 years old.
For Singaporean citizens and PRs, most banks require a minimum annual income of at least S$30,000, regardless of whether they are salaried employees or self-employed individuals.
Foreigners seeking personal loans in Singapore have higher income requirements. Depending on the bank, the expected minimum annual income ranges between S$40,000 to S$60,000.
Applicants are also asked to provide proof of address and proof of income. This might include payslips or CPF statements.
Personal Line of Credit
Similar to personal loans, applicants for a personal line of credit must be at least 21 years old.
For Singapore citizens or Permanent Residents, the minimum annual income required is typically S$30,000. However, some banks, like DBS and OCBC, might consider applicants earning between S$20,000 to S$29,999 for a credit line, although they may be subjected to a higher interest rate.
It’s important to note that personal lines of credit may not be available to foreigners and could be exclusive to Singapore citizens and Permanent Residents.
Personal Loans Vs. Personal Lines Of Credit: Key Differences
While both personal loans and personal lines of credit can be used for a variety of purposes, there are some key differences between the two that you should consider before making a decision.
|Personal line of credit
|Fixed (up to 20% p.a.)
|Variable (up to 20% p.a.)
|How you receive the funds
|Revolving line (as needed)
|Credit score requirement
The effective interest rate is one of the major differences between personal loans and personal lines of credit. Personal loans typically have fixed interest rates which means that the interest rate will remain the same throughout the repayment period. On the flip side, personal lines of credit usually have variable interest rates that can fluctuate depending on market conditions.
How you receive the funds
With a personal loan, you will receive the approved loan amount as a lump sum. Meanwhile, a personal line of credit operates differently. After your application is approved, you gain access to funds through a card or checks that are linked to your account. Then, you have the flexibility to withdraw any amount whenever you need, up to your approved credit limit. This unique setup allows you to use the funds only as needed, paying the balance and re-borrowing as necessary.
A personal loan operates as an instalment loan since it involves borrowing a fixed sum repaid over a specific period, ensuring consistent monthly payments.
A personal line of credit falls under revolving credit since it enables multiple withdrawals from the same credit line, given that funds are still available. As your withdrawals and interest rates fluctuate, your monthly payments are also subject to change.
Personal Loans Vs. Personal Lines Of Credit: Similarities
To give you a better picture of the similarities between personal loans and personal lines of credit, keep on reading.
The good news is that both personal loans and personal lines of credit are often unsecured, meaning that you don’t have to put up collateral such as a car or house to qualify for borrowing. This is extremely beneficial for people who do not have assets or do not want to risk losing their assets in case of defaulting on the loan.
Flexible use of funds
With Personal Loans vs. Personal Lines of Credit, you have the flexibility to use the borrowed funds as you see fit. Whether it’s for home renovations, debt consolidation, or even a vacation, these options allow you to use the funds for whatever purpose you need.
It’s worth noting that both personal loans and personal lines of credit require monthly payments. With a personal loan, the payments are fixed and consistent throughout the repayment period. With a personal line of credit, the payments may fluctuate based on how much you borrow and the interest rate at the time of borrowing.
Credit score and income requirements
Both personal loans and personal lines of credit require a good credit history and income to qualify. This ensures that the borrower has a history of making timely payments and has the financial ability to repay the borrowed amount. Lenders may also consider the debt-to-income ratio to ensure that the borrower can manage the monthly payments.
Competitive interest rates
While personal loans may have fixed interest rates, they are often lower than credit card rates and other forms of borrowing. On the other hand, personal lines of credit may have variable interest rates, but they also tend to have lower rates than credit cards and other revolving credit accounts. This makes both options attractive for those looking to borrow money at a reasonable cost.
Personal Loans Vs. Personal Lines of Credit: Which One Should You Take?
The decision between a personal loan and a personal line of credit depends on your financial needs and goals. If you are looking for a one-time lump sum of money for a specific purpose, a personal loan might be the better option for you. With a fixed interest rate and set repayment period, you can easily budget your monthly payments and know exactly when you will be debt-free.
On the other hand, if you need more flexibility and access to funds over a longer period of time, a personal line of credit might be a better fit. You can borrow money as needed, up to your approved credit limit, and only pay interest on the amount you borrow. This can be especially useful for ongoing expenses or unpredictable expenses that may arise. Additionally, a personal line of credit can be a great tool for those who need to maintain liquidity in their finances, as it allows for quick and easy access to funds when needed.
A Word From OMY
Ultimately, deciding between Personal Loans vs. Personal Lines of Credit should be based on your individual financial situation and borrowing needs. Take the time to weigh the pros and cons of each option and carefully consider your long-term financial goals before making a final decision. Remember, borrowing money is a serious decision and should not be taken lightly.
If you’re ready to apply for a loan, we’re here to help. OMY is committed to giving you the best tailored loan options so you can save time and effort. Head over to this page to get a loan offer.