The most common types of credit offered by lenders are personal loans and lines of credit. And, of course, there are credit cards - a form of line of credit. Here are the differences:
Personal Loans
Personal loans offer a specified amount of money that will be paid off with interest in equal monthly payments over a set period of time - usually one or more years.
Lines of Credit
Lines of credit provide ongoing access to a maximum amount of borrowed funds - called a credit limit. You'll receive a credit card or checks to access your line of credit for purchases or
cash - up to the maximum credit limit. Each month, you're required to make a payment to your line of credit - either paying it off in full or just paying the monthly minimum. Monthly interest
is charged based on the average daily balance owed. Your line of credit can also be linked to your checking account for overdraft protection.
Credit Cards
Credit card accounts are lines of credit that enable you to make purchases on your card. As you shop around for a credit card, you'll find that fees, interest rates and features vary
from one card to the next. You can use your card to make purchases anywhere it's accepted and for anything you need - up to your credit limit (which is based on your credit history,
income and other factors). Each month, you'll receive a statement that includes a description of your purchases, your balance, your minimum monthly payment, and the due date. You have
the option to pay your balance in full or just pay the monthly minimum.
Home Equity Loans
Home equity loans and lines of credit are secured by the value of your home, which means you can take advantage of interest rates that are usually lower than those found with most
other kinds of credit. With a home equity loan, you get a one-time lump sum of money that is paid off over a set period of time, typically with a fixed interest rate and the same
payment each month. By comparison, a home equity line of credit has a revolving balance, so you can borrow money as you need to, up to a certain amount. And you only pay interest on the amount you borrow.
Student Loans
Student loans are loans offered to both parents and students to help pay for tuition and other college expenses. There are several different types of student loans available.
Some charge interest from the time of the loan disbursement, while others start to charge interest when the loan repayment period begins.
