No matter how disciplined and budget savvy you are, life can throw you a curveball and derail your financial plans. And it might leave you wondering whether you need a personal loan or line of credit.
The right answer depends on your financial needs and situation. To break down the difference in requirements of obtaining a personal loan or line of credit, we spoke with assistant professor of finance, Constantine Yannelis, at the Leonard N. Stern School of Business at New York University.
Wondering if you should get a personal loan or line of credit? Use our conversation with Constantine Yannelis below as a guide:
Q1. Are there differences between obtaining a personal loan and a line of credit?
A1. A personal loan is a loan for a specific amount, whereas a line of credit allows individuals to borrow up a limit.
Q2. Are there particular situations when someone should consider getting a personal loan?
A2. If people need to borrow for a specific project, such as a home renovation, or if they have self-control problems, then it can make sense to take out a personal loan.
A pre-specified amount helps people to avoid over-borrowing and making impulsive purchases. On the other hand, if people have indeterminate borrowing needs or surprised expenses, opening a line of credit can make sense.
Q3. Each lender sets their own qualifications. Which qualifications do you feel should be necessary for an individual to be approved for a personal loan? What does responsible lending look like?
A3. Loans secured by an asset typically offer lower interest rates. What key qualification is ability to repay the loan, either through future income streams or by selling assets.
Thus a job or assets are key qualifications.
Q4. Lenders offer personal loans to borrowers for a range of purposes, from paying medical bills to paying for a vacation. Is there a difference between how lenders evaluate borrowers for various personal loan purposes? For example, is a borrower evaluated differently when getting a personal loan for a vacation versus getting a personal loan to pay medical bills?
A4. This depends on the particular lender. Generally having a high credit score is important in securing a personal loan.
We’d like to extend our sincere thanks to Constantine Yannelis for taking time to share his valuable insights.