Lines Of Credit Vs Term Loans: Which Is The Better Choice?

When you are in a situation where you need some cash to finance some big-ticket items, or even to fund your business, two credit sources come to mind: term loans and lines of credit. What’s the difference between them, and which is the better choice?

Simply put, lines of credit and term loans are both ways to obtain money for temporary use – but the similarities end there. They vary greatly in terms of how the credit is dispensed and repaid. Here’s a closer look at each of them.

Lines of Credit

The most common line of credit is a credit card, but lines of credit for businesses and home equity also exist. In a line of credit, users are entitled to draw and spend up to a certain set limit. After reaching the limit, you will need to fully repay that amount – with interest, if any – before you can spend credit again.

Using the credit card as an illustration, we can see how a line of credit works. Credit cards have a monthly limit. Say, if you set the limit at $5000, then that’s the maximum you can spend in any one-month period. At the end of the month, you will need to repay the amount you spent, otherwise you will face penalty fees and be unable to use the credit in the next month.

Term loans

When people refer to loans, they often mean a term loan, or instalment loan. A loan is a sum of money borrowed at once, and repaid over a given period in instalments. Various types of loans exist, from personal loans to business loans. Apart from borrowing from banks, in Singapore you can also obtain loans from licensed moneylenders.

Different loan types vary in terms of their interest rates and repayment plans. For licensed moneylenders, the interest rate is capped at 4% per month. Depending on the loan amount and ability of the borrower, the loan may be repaid in as quick as a few months, or in several years.

Which is better?

Generally speaking, a term loan is better for cases where you require one-off spending. For example, this could be buying a car or home, or funding an overseas trip. The fixed interest rate of a term loan makes it a safer choice for such purchases.

However, if you anticipate ongoing spending that is varied and unpredictable, a line of credit might be a better choice than taking out several loans. Examples of such situations are for monthly business expenses, or personal lifestyle use.

Most lines of credit have variable interest rates, which are often higher than that of a loan. However, credit cards usually don’t require you to pay interest if you repay the amount in time. So, when deciding which line of credit or loan to choose, it is crucial to take all these into account, and determine whether it is worth it.

At the end of the day, there is no one right or wrong answer of which is better. Need quick cash? A cash loan might be for you. Need to finance ongoing unplanned spending on supplies in your new business venture? Then perhaps consider a line of credit. Also, don’t forget to compare between different lenders and credit providers for the most favourable interests and repayment plans, if you really want to make your money’s worth.

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