It can be confusing to decide between lines of credit or loans given the financing options available in the market. What’s the difference between the two? Each has its benefits and drawbacks, and making the wrong choice could cost you.
How to decide which one works better for you? Here are the things to consider.
Reusable loan vs. one-off amount
A line of credit is a preset borrowing limit which can be accessed at any time. In a way, It’s like a credit card, giving you money as needed.
A line of credit could better suit you if you’re not sure how much you’ll need, like if you’re planning a wedding. After you’ve repaid it, you can withdraw the money again if you need more funds later.
A loan gives you a lump sum, which can be good if you want a one-off amount. Loans can be used for all kinds of things — home renovations, medical bills, debt consolidation, holidays, etc.
Monthly repayments, interest rate, & other costs
Both of them entail monthly repayments. Although with a line of credit, it depends on the amount you draw, your previous balance, accruing interest, and other factors. While the monthly payment for a loan is fixed.
The interest rate on a loan is either:
- fixed-interest rate — it won’t change over the loan term.
- variable interest rate — it may rise or fall depending on market rates.
You should also look at the establishment fee of the loan you have in mind.
As for a line of credit, the interest may be paid on a monthly basis, where the charge depends on the borrowed amount.
The interest rate on a line of credit, providing the added convenience, can be slightly higher than on a loan.
No term vs. fixed term
Lines of credit have no set loan term, and you can borrow again after the funds have been repaid, plus the interest. You pay a set amount or a percentage of around 2% of your monthly balance, whichever is greater.
In contrast, loans have a fixed term (between 1 and 7 years) and you do repayments in full by the end of the term. Moreover, as your monthly repayments are set out in the contract, you know exactly how much it is and you can budget for them.
Fast business loans in Australia
When you apply for a business loan from a bank, they’ll want to check your credit rating as well as your financial history. This process usually takes a lot of time. Cigno Business Solutions‘ process is far more simple.
CBS will look at your current turnover and assess your ability to repay the fast business loans that’ll be offered to you. Faster loans… far less fuss!
You’ll just need to have a 90-day bank statement and a registered ABN in order to complete the online application.
