By Nicole Dow | NerdWallet

Personal loans and personal lines of credit are both helpful tools to cover large expenses. These financing options have similar benefits, like no collateral requirements and low rates for well-qualified borrowers, but deciding which is right for you comes down to how you prefer to receive and repay the funds.

Learn the similarities and differences between personal loans and personal lines of credit to determine which is right for your plans.

Personal loans and personal lines of credit are typically unsecured, meaning you don’t have to pledge an asset as collateral in order to borrow. It also means the lender will rely mostly on your credit, income and existing debts to determine whether you qualify.

When you apply for either financing option, the lender will pull your credit report to examine your creditworthiness and how you handle existing debts. Applicants with good credit and low debt-to-income ratios have the best chances of qualifying and getting the lowest rates.

“The qualifications for both loan types are determined by an individual’s credit experience, employment stability and ability to repay the debt,” Jean Hopkins, director of consumer lending at WeStreet Credit Union in Tulsa, Oklahoma, said in an email interview.

Banks and credit unions offer personal loans and lines of credit, while online lenders offer personal loans, but usually not credit lines. Qualified applicants may be able to borrow up to $100,000 with either type of financing.

With both options, borrowers repay the debt, plus interest, over time. Missed payments are typically reported to credit bureaus after 30 days and can negatively impact your credit score.

Though qualifying for these two financial products can work similarly, they are two different types of credit. A personal loan is a type of installment loan, and a personal line of credit is a type of revolving credit.

With a personal loan, you receive funds as a lump sum and make payments in even installments over a fixed term, typically two to seven years.

Interest on personal loans is charged on the entire loan amount at a fixed rate.

“When payments are applied to the principal balance of a line of credit, that amount is made available to borrow again,” Hopkins said.

A personal line of credit generally has a “draw” period and a “repayment” period, Katherine Fox, certified financial planner and founder of Sunnybranch Wealth in Portland, Oregon, said in an email.

The draw period is when you can access money from the credit line and make minimum monthly payments or interest-only payments, depending on the lender. This period typically lasts from two to five years. Once the draw period is over, you’ll enter the repayment period, when you can no longer withdraw money and must make payments until the end of the term, which can be up to 10 years.

Personal lines of credit have variable interest rates, and you only pay interest on the amount you draw. This means the monthly payment on a personal credit line can fluctuate.

Finally, the fees are different on personal loans and personal lines of credit. A personal loan may come with an origination fee, which the lender typically takes from the loan before sending you funds. A personal line of credit may have an annual maintenance fee as well as withdrawal fees every time you access funds.

A personal loan is a good idea when you know exactly how much you need to borrow and want a predictable repayment schedule. It can be ideal for:

“If you have an immediate need for a specific amount of cash, it makes more sense to get a personal loan,” Fox said. “You get all the cash you need at once and you will pay it back with a fixed interest rate.”

A personal loan may also be cheaper in the long term because you lock in an interest rate for the full loan term, Hopkins said. If the federal funds rate rises while you’re repaying a personal loan, for example, your rate and monthly payment won’t increase.

Additionally, while interest rates are heavily based on the borrower’s credit and income, starting rates may be lower on personal loans than on personal credit lines.

Pros

Cons

You might consider opening a personal line of credit if you need ongoing access to cash. This financing option may be ideal if you expect your expenses to fluctuate over time. Examples of expenses that may be right for a personal line of credit include:

“If you are uncertain if you will need cash, uncertain about how much you will need and/or uncertain when you will need it, a personal line of credit may make more sense” than a personal loan, Fox said. “It gives you the flexibility to pull out more or less cash on your own timeline, rather than getting a single lump sum that you are responsible for repaying.”

Pros

Cons

More From NerdWallet

• Should You Use a Personal Loan to Pay Taxes?
• 6 Signs of a Personal Loan Scam
• What Are the Requirements for a Personal Loan?

Nicole Dow writes for NerdWallet. Email: articles@nerdwallet.com.

The article Personal Loan vs. Line of Credit: How to Choose originally appeared on NerdWallet.