Which is better for you?

A surprise expense is rarely welcome, especially during a time of rising costs. Fortunately, certain types of financing can help you cover a surprise cost, whether it’s a one-time or ongoing expense.

Two flexible financing options are personal loans and personal lines of credit. Many lenders offer them, and both have relatively low interest rates. That said, each is structured differently, and one may be a better fit than the other.

Here’s what to know when comparing a personal loan vs. a personal line of credit.

A personal loan is a lump-sum loan that you pay back in fixed monthly installments over a set term. These loans can be used for almost anything, and they’re popular options for consolidating credit card debt or funding a large purchase.

These loans are typically unsecured, meaning you don’t need to provide collateral — an asset the lender can repossess if you default. While secured personal loans exist, they’re not as common. To secure a personal loan, you might pledge a savings account or other asset to improve your chances of qualifying or avoid a high interest rate.

Generally, personal loans have fixed interest rates, meaning your rate won’t change over your repayment term. Rates tend to be lower than what you’d get with a credit card, and repayment terms are often as long as five or seven years.

When evaluating your application for a personal loan, your lender will look at a few different factors, including the following:

Credit score: This gives lenders insight into how well you manage debt. Credit score requirements for borrowers vary by lender, though most require fair or good credit for a personal loan. Borrowers with excellent credit typically qualify for the best interest rates.
Credit report: Your credit report allows lenders to evaluate your payment history, the type and mix of accounts (including loans and credit cards) you’ve opened, and the amount of debt you carry.
Debt-to-income ratio (DTI): Your DTI measures how much debt you carry compared to your gross monthly income. This helps a lender determine whether you can afford additional debt or are stretched too thin.

If you can’t qualify for a personal loan on your own, some lenders let you apply with a co-borrower or co-signer. This allows you to add a loved one to your application with their credit and financial profile reviewed alongside yours. If your co-applicant is well qualified, you could be eligible for lower rates than you would on your own. However, they will also be responsible for your debt if you’re unable to repay it.

Taking on new debt isn’t an easy decision, but it can be helpful if you need to cover a one-off expense, such as:

Debt consolidation
Home improvements
Large purchases
Medical bills
Moving costs

Some might recommend using a personal loan to pay for discretionary expenses such as a vacation, but that can be an expensive option. Instead, consider a personal loan if you need to cover an essential cost and you know how much that expense will be.

A line of credit, or personal line of credit (PLOC), is a type of revolving credit line, similar to a credit card. PLOCs often have variable interest rates that can change with market conditions and the prime rate.

But unlike credit cards, PLOCs have a predetermined draw period, often several years long. During this time, you can borrow against your credit line as needed. You only pay interest on the amount you borrow, not your total available credit. If you repay your PLOC during the draw period, you regain access to those funds.

If you have a $10,000 line of credit and borrow $2,500, for example, your available balance would be $7,500 — which you could continue to draw from. While you would have to pay interest on the $2,500 you borrowed, you could tap into the full $10,000 balance again if you paid it back within the draw period.

When your draw period expires, you’ll enter a repayment period and can no longer borrow money from the PLOC. During this time, you must repay your outstanding balance (including interest) in fixed monthly payments.

The process of qualifying for a PLOC is similar to that for a personal loan. Lenders evaluate your credit score, credit history, and DTI in the same way. If you don’t qualify for a credit line on your own, you may be able to apply with a co-borrower or co-signer to improve your odds.

A PLOC could be ideal if you need ongoing access to funds, such as:

Remodeling or renovating your home
Making up for lost income
Wedding or other event planning
Other projects with ongoing costs

If you’re remodeling or renovating your home, a line of credit can give you consistent access to funds throughout the duration of the project, allowing you to pay for labor and materials as needed. Or, if you’re struggling to make ends meet between jobs, a line of credit could give you a cushion until your income stabilizes and you’re in good standing.

Personal loans and personal lines of credit can both help cover surprise expenses, but they work best in different situations.

A personal loan is usually the better fit for a one-time expense with a clear price tag. For example, if you’re paying a fixed amount for a medical procedure, a personal loan lets you borrow the full amount upfront and repay it on a set schedule.

A PLOC makes more sense when costs are uncertain or spread out over time. Say you’re updating an older home and tackling projects as you go: Because you can draw from a PLOC as needed and only pay interest on what you use, it can be a more flexible option when the final cost isn’t known from the start.