If you are thinking about applying for a loan, it can be difficult to know which loan option is best for you. This article breaks down the differences and pros of both a fixed term loan and a line of credit.
Overview of Fixed Term Loans vs Line of Credit
Fixed term loans and line of credit are both types of lines of credit. They differ in how much money you can borrow, terms, interest rates, fees and limits.
Both loans have advantages and disadvantages. A fixed term loan has a set expiration date, while a line of credit is a revolving loan that can be continually renewed as needed.
Comparison of the Pros and Cons
A fixed term loan will have a longer payback period than a line of credit, which allows you to borrow up to your total limit on the loan. You can also repay the entire balance at once with a fixed term loan, while with a line of credit you must make monthly payments. The trade-off is that interest rates on a line of credit are typically lower than with a fixed term loan.
A fixed term loan is an individual loan, secured by collateral. The borrower agrees to repay the loan in a fixed period of time. If for some reason the borrower cannot repay the loan, the lender has the power to repossess and sell the collateral to recover their losses. On the other hand, a line of credit is an unsecured loan from a lender, which allows multiple loans up to a certain limit over time. This gives consumers greater flexibility when it comes to repayment plans.
Tips for Borrowing Money
For some people, a fixed term loan can be a good option. A fixed term loan will have an end date and the person is either required or allowed to pay back the loan with interest when the term is over. A line of credit, on the other hand, has no end date and is typically unsecured. This means that your credit score won’t affect whether you’re eligible for a line of credit.
If you are considering a line of credit, and not a fixed term loan, it is important to know the difference. A fixed term loan can be a good option if your business can consistently pay back the loan in the set time frame. The best way to make sure that your business will be able to consistently pay back a fixed term loan is by completing a personal financial statement.