A personal line of credit OR loan from a licensed moneylender? The answer may surprise you

by Josh Biggs in Finance on 14th July 2021

With so many different credit options at our disposal, they can all seem nearly identical. That is generally true, but those small differences can add up to significant expenses for the unwary. In this post, we compare a loan from a licensed moneylender with a personal line of credit from a bank.

Learn what makes each of them unique, and how one can work better than the other in different circumstances.

Definitions and differences

Most of us understand what a low interest personal loan is. It is money that is lent to a borrower on credit. The loan agreement between lender and borrower specifies the interest charged on the loan and the time the borrower has to repay the loan plus the interest. This repayment is usually made in fixed instalments every month.

A personal line of credit is somewhat of a hybrid of a credit card and a personal loan. It is unsecured (you do not have to nominate collateral) but you need a checking account with the same bank. You access as much or as little cash as you need, when you need it (within the approved limit) and only pay interest on what you borrow.

The main difference is that a loan from the best licensed money lender gives you a fixed amount of cash whereas you can borrow varying amounts as you need with a credit line. 

The main advantage of a low interest personal loan over a line of credit is that you get all the cash at once and there is no withdrawal process every time you need money. The main advantage of a line of credit is that you pay interest only on the small amounts that you borrow, instead of on a large lump sum.

There are several similarities between loans from a licensed moneylender and a line of credit from a bank, too. They both have a pre-determined upper limit, require the borrower to make minimum monthly repayments, charge a fixed interest rate, and attract processing fees with every application.

When to use each

A loan from the best licensed money lender is perfect for when a borrower needs a specific amount of cash immediately. Examples of this would be:

  1. Home renovation – Any decent contractor will give you an accurate breakdown of costs for labour, materials, and fittings before they begin. 
  2. Education – Most universities and colleges charge a fixed amount for every course they offer, as well as for board and miscellaneous student expenses.
  3. Vehicle – A vehicle is a large, one-off purchase at a fixed price. A low interest personal loan is perfect whether you are paying the entire amount or just the down payment.
  4. Short trips – Fixed package vacations of up to a few weeks fall into specific price brackets and you can choose whichever is most compatible with your current finances.
  5. Debt consolidation – A good moneylender will help you streamline all your debts into a single, easy-to-manage channel, and offer a competitive low interest rate as well.

In all these situations, you know exactly what you are getting into with the best licensed money lender you can find, how much you will need to repay every month, and for how long.

A line of credit from a bank is better suited when the borrower expects to face varying expenses, both small and large, over an extended period of time. Some examples would be:

  1. Extended travel – If you are fortunate enough to be travelling with an open-ended return date, use your line of credit as and when the need arises.
  2. Wedding – Anyone who has planned a wedding knows that it is bound to be rife with new and unexpected expenses, big and small.
  3. Emergency fund – A line of credit places a fixed amount in your kitty to draw on as you wish, without paying interest on anything you don’t use. It is the perfect emergency fund solution.

These are examples of expenses that are more fluid, and the advantage of a line of credit is that you only pay interest on what you use.

The decision on whether to get a loan from a licensed moneylender or apply for a bank line of credit may vary according to your circumstances. We have laid out a general approach to choosing between the two but you should always consult with an accountant before taking a major financial decision. 

Categories: Finance