Line of Credit vs Loan: What Are the Differences?
Line of Credit vs Loan: What Are the Differences?
Choosing between a line of credit and a loan is a common financial decision for Australians. While both provide access to funds, they operate in very different ways, and understanding those differences can help you avoid unnecessary costs, complexity, or financial stress.
The core distinction is straightforward.
A loan provides a lump sum upfront for a specific purpose.
A line of credit offers flexible, ongoing access to funds that can be reused over time.
Both options can be useful depending on your circumstances. This guide explains the difference between a loan and a line of credit in clear terms, compares flexibility and cost considerations, and helps you understand which option may better align with your financial situation.
What is a loan?
A loan, often referred to as a term or instalment loan, provides a fixed amount of money upfront that you repay over an agreed period through regular repayments.
Interest typically applies to the full loan amount from the start, regardless of how quickly you use the funds. Once the loan is paid out, additional borrowing usually requires a new application.
How loans generally work includes applying for a set amount, being assessed based on income, credit history, and affordability, receiving the full amount upfront, making regular repayments that include principal and interest, and closing the loan once it is fully repaid.
Loan terms vary depending on the type of loan. Personal and car loans often range from one to seven years, while home loans can extend much longer.
Key features commonly include one-time access to funds, structured repayments, often fixed interest rates, a clear end date, and predictable monthly payments.
Common loan types include personal loans, car loans, home loans, student loans, business loans, and debt consolidation loans. Loans may be secured or unsecured and may have fixed or variable interest rates.
What is a line of credit?
A line of credit is a revolving credit facility that allows you to borrow up to an approved limit, repay what you use, and then borrow again.
Instead of receiving all funds upfront, you draw money only when required. Interest is charged only on the amount you have used, not the total approved limit.
A line of credit typically involves being approved for a limit, accessing funds as needed, making minimum repayments, and having credit become available again as repayments are made. This can continue during the agreed draw period.
Key features often include reusable credit, flexible borrowing amounts, interest charged only on funds used, usually variable interest rates, and ongoing access during the draw period.
Funds are commonly accessed via bank transfer or an online account, depending on the lender.
Types of lines of credit include personal lines of credit, home equity lines of credit, and business lines of credit.
Line of credit vs loan: main differences
Understanding how a loan and a line of credit differ can help you select a product that matches your needs.
With a loan, funds are provided as a lump sum and can only be used once. With a line of credit, funds are drawn as needed and can be reused.
Interest on a loan is charged on the full amount from the start, while interest on a line of credit applies only to the amount borrowed.
Loans usually have fixed monthly repayments and often fixed interest rates, which can make budgeting simpler. Lines of credit usually have variable repayments that change based on how much is used and may fluctuate with interest rate changes.
Loans are generally better suited to known, one-off expenses. Lines of credit tend to suit ongoing or uncertain costs where flexibility is important.
When to choose a personal loan
A personal loan is often considered when you know exactly how much money you need and want repayment certainty.
This can apply to situations such as buying a car, consolidating debt, paying for medical procedures with fixed costs, covering wedding expenses, or completing renovations with a defined budget.
Personal loans may also suit people who prefer structure, fixed repayments, and a clear end date. Fixed interest rates can provide protection from interest rate changes and make long-term budgeting more predictable.
When to choose a line of credit
A line of credit may be more suitable when expenses are uncertain, spread over time, or irregular.
Common situations include home renovations with changing costs, education expenses paid periodically, medical expenses over time, or managing short-term cash-flow gaps.
Some people also view a line of credit as a complement to emergency savings, providing access to funds if needed without paying interest when unused.
Can you have both?
Some Australians use both a loan and a line of credit as part of a broader financial strategy.
For example, a personal loan may be used for a large, known expense, while a line of credit is kept available for emergencies or short-term flexibility. This approach requires careful budgeting and ensuring repayments on both products remain affordable.
Credit24: personal loans and lines of credit
Credit24 offers both personal loans and personal lines of credit, allowing customers to choose the option that best suits their needs.
Personal loans typically suit one-off expenses and include set loan amounts, fixed interest rates, structured repayments, and a defined repayment period.
Personal lines of credit offer flexible access to funds, interest charged only on the amount used, reusable credit during the term, and access to funds via OSKO for eligible banks.
Both options involve an online application, transparent terms, and responsible lending assessments.
Disclaimer
IPF Digital Australia Pty Ltd, trading as Credit24, ABN 59 130 894 405. Australian Credit Licence 422839.
The information in this article is general in nature and does not consider your objectives, financial situation, or needs. Lending criteria, fees, and charges apply. For product details, eligibility requirements, and full terms and conditions, visit www.credit24.com.au.
