Term Loan vs. Line of Credit: What’s The Difference?

You’ve heard the terms of Loan and Line of Credit. Is it just fancy lingo or is there actually a difference? Yes there’s a big difference. The major difference is in how the product works.

When a borrower gets a term loan, the borrower has a set balance (or loan balance). That balance will have a maturity date in which the borrower must pay the loan off in full either on or before the maturity date. Some examples would be a Payday Loan. A payday loan requires you to pay back the balance in a short time generally 2 weeks. A car loan may require you to pay off the loan in full within 6 years, while a mortgage loan may require you to pay off within 30 years. Each of these examples has you getting a certain amount of money from the lender and the lender requires you to pay back that loan within a certain timeframe. (maturity date) Interest on a loan accrues immediately when the funds are taken by the borrower and continues to accrue until the loan is paid off either early, or at the maturity date. Some lenders even charge you a prepayment penalty for paying the loan off early.

A credit line operates slightly different. Just like a loan, the borrower is approved for a certain amount of money. Only instead of a loan, its called a credit line. Meaning the borrower gets approved for a certain amount, however the borrower can take all or any part of that credit line. An example would be a borrower gets approved for $1000.00 credit line. The borrower can take all of that or some of that. In our example, the borrower could take only $500.00 of that $1000.00 credit line. With a credit line, the borrower isn’t required to pay off the loan within a set time, but rather as they see fit. There’s no maturity date with credit lines which makes them a more flexible payment option for the borrower. What makes credit lines even more flexible is as the borrower pays down, they have the option to take out more of their available credit as they need. Only the amount the borrower takes from their credit line draws interest.

Still having trouble deciding? Give one of KeyX’s friendly customer service representatives a call at 801-364-2200. We’re happy to discuss credit line options for you. If you have current loans outstanding, bring them in. We’ll gladly show you how much you’re currently paying and how much you can save with a KeyX credit line today!