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What’s the Difference Between a Loan and a Line of Credit
by
JG Wentworth
•
July 8, 2025
•
6 min
When it comes to borrowing money, the options can feel endless- and a bit confusing. Two of the most common ways people access funds are through loans and lines of credit. While they might seem similar at first glance, these financial tools serve very different purposes and come with unique rules and responsibilities. Understanding the key differences can help you make smarter decisions, whether you’re funding a home renovation, covering emergency expenses, or planning for long-term goals.
JGW Connects does not provide any of the products or services advertised and does not make any decisions regarding your eligibility for those products or services. All decisions regarding approval or denial of a particular product or service are the responsibility of the participating company and will vary based upon your particular financial situation, and criteria determined by the company to whom you are matched. Not all consumers will qualify for the advertised rates and terms.
What Is a Loan?
A loan is a lump sum of money you borrow from a lender with the agreement to pay it back over time, typically in fixed monthly payments. Loans are usually issued for a specific purpose—think personal loans, auto loans, mortgages, or student loans.
When you take out a loan, the terms are generally locked in from the start:
- Fixed amount: You receive the entire loan amount upfront.
- Set repayment schedule: You pay back the loan in equal installments over a set period.
- Interest: You’re charged interest on the full amount, and the rate may be fixed or variable depending on the loan.
- Purpose-driven: Loans are often tied to a particular need or purchase.
Common Types of Loans:
- Personal Loans: Unsecured loans used for anything from consolidating debt to paying for a wedding.
- Auto Loans: Secured by the vehicle you’re buying.
- Mortgages: Long-term loans for purchasing real estate.
- Student Loans: Used to finance education-related expenses.
What Is a Line of Credit?
A line of credit is a flexible borrowing option that works more like a credit card. Instead of receiving a lump sum, you’re given access to a set amount of money that you can draw from as needed. You only pay interest on the amount you use, not the total credit limit.
Think of it as a safety net or a financial cushion you can tap into over time.
Key characteristics of a line of credit:
- Revolving access: You can borrow, repay, and borrow again—up to your limit.
- Flexible usage: Withdraw funds only when needed.
- Interest applies only on borrowed amount: If you don’t use the full limit, you’re not paying interest on it.
- Variable interest rates: Most lines of credit come with rates that can fluctuate.
- Open-ended term: As long as you stay in good standing, your access remains open.
Common Types of Lines of Credit:
- Personal Line of Credit: Often unsecured and based on your creditworthiness.
- Home Equity Line of Credit (HELOC): Secured by the equity in your home and commonly used for home improvements or major expenses.
- Business Line of Credit: Helps businesses manage cash flow and cover short-term costs.
Key Differences at a Glance
Feature | Loan | Line of Credit |
Structure | Lump sum | Revolving credit |
Access to Funds | One-time disbursement | Withdraw as needed |
Interest Charges | On total loan amount | Only on amount used |
Repayment | Fixed installments | Flexible, minimum payments possible |
End Date | Fixed term | Often open-ended |
Common Use Cases | Big purchases, debt consolidation | Emergencies, fluctuating expenses |
Collateral Required | Sometimes | Often for secured lines like HELOCs |
Flexibility | Low | High |
Apply for a personal loan
Apply for a personal loan
When Does a Loan Make Sense?
A loan is often the better choice if you:
- Know exactly how much money you need.
- Want predictable monthly payments.
- Are financing a one-time purchase (car, wedding, home improvements).
- Prefer a structured repayment plan.
For example, if you’re consolidating high-interest credit card debt, a fixed-rate personal loan gives you clear repayment terms and can help you stay on track.
When Is a Line of Credit a Better Fit?
A line of credit might make more sense if:
- You’re unsure how much you’ll need upfront.
- You have ongoing or fluctuating expenses.
- You want the flexibility to borrow and repay as needed.
- You’d like a financial cushion for emergencies.
Let’s say you’re starting a home renovation but don’t know the total cost yet – a HELOC gives you the flexibility to borrow in stages, based on how the project progresses.
Credit Score Considerations
Both loans and lines of credit require a credit check, but they can affect your score in different ways:
- Loans add a fixed installment account to your credit mix, which can be helpful for credit diversity.
- Lines of credit, especially if revolving, are treated more like credit cards. Keeping your balance low relative to your limit can help your credit score, while maxing it out can hurt.
Costs Beyond Interest
Keep an eye out for fees. Loans may come with origination fees or prepayment penalties, while lines of credit can include annual fees, draw fees, or inactivity fees. Always read the fine print.
Which Option Is Right for You?
Here are a few questions to help you decide:
- Do I need a specific amount of money for a single purpose?
- Will I need to borrow multiple times over a period?
- Do I prefer fixed monthly payments or flexible repayment?
- Am I prepared for variable interest rates?
Ultimately, the right option depends on your goals, financial discipline, and comfort with flexibility versus structure. In many cases, people use both types at different times in life depending on the situation.
Final Thoughts
Loans and lines of credit are powerful financial tools, but they serve very different needs. A loan provides structure and certainty, making it ideal for big, one-time expenses. A line of credit, on the other hand, offers flexibility and ongoing access to funds, which can be a lifesaver for unexpected costs or variable spending.
By understanding how each works, you’ll be in a stronger position to choose the right borrowing method for your needs, your budget, and your peace of mind.
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*Any information provided on this site is for educational purposes only. JGW Connects, LLC is not an agent of you or any third party advertiser on this website. You should rely on your own judgement in deciding which available product, terms and provider that best suits your personal financial requirements. We do not offer financial advice, advisory or brokerage services. We recommend that you consult with our own independent advisors regarding these products and services
JGW Connects, LLC is an independent, advertising-supported comparison site and marketing lead generator and does not play a role in decisioning for any of the third party products advertised on this webpage. JGW Connects, LLC and the JG Wentworth Company family of companies are not affiliated with the companies advertising on this webpage. You are not charged for our services. JGW Connects, LLC may receive a referral fee or other affiliate fee for connecting you with these third-party companies or upon you contracting with a third-party company. We do not make any guarantees that these are the only providers in the marketplace, or that their products or services will meet your needs. The products and services presented to you may or may not be the best, or only options, available.
JGW Connects does not provide any of the products or services advertised and does not make any decisions regarding your eligibility for those products or services. All decisions regarding approval or denial of a particular product or service are the responsibility of the participating company and will vary based upon your particular financial situation, and criteria determined by the company to whom you are matched. Not all consumers will qualify for the advertised rates and terms.