What’s the Difference Between Line of Credit and a Loan?

The short answer: A loan is a type of credit. But not all forms of credit are loans.

But it gets a bit more complicated when you consider that credit can mean more than one thing. Find out more about the difference between a loan and credit below, including the differences in applying for loans versus other forms of credit.

What Is Credit?

a customer hands over a credit card to a clerk

The word credit has a number of meanings. For example, when you share a thought or idea that came from someone else and you link back to them online or identify them as the author of the idea, you are crediting them.

But in the context of this article, credit can mean two things specifically:

  • Financial standing. This meaning of credit has to do with how you’re perceived as a consumer and borrower. The better your credit is, the more likely lenders or others might be agreeable to working with you. This type of credit is reflected numerically by your credit score.
  • Monetary credit to you. In accounting, credit goes in the plus or income column. When the bank credits your account, it adds money to the total. And when a lender agrees to offer you money—whether via a loan, a credit card, or another format—the amount of money you have access to increases. When someone says “I bought it on credit,” they mean they bought something with this “increased access to money” that they eventually have to pay back.

What Is a Loan?

a pen sits on top of a loan agreement

A loan is a specific type of credit. It’s a form of installment credit. It’s also a contract.

While the details may vary, loans tend to work like this:

  • A lender agrees to provide you with a specific amount of money. You, in turn, agree to pay back the money over time and at an agreed upon interest rate.
  • The money is given to you in a lump sum.
  • You use the money as you see fit or according to the requirements of the loan. For example, an auto loan typically requires that the money be paid directly to the dealership, whereas a personal loan involves money being paid directly to you.
  • You pay the loan back in installments. That might be weekly, biweekly or monthly payments of a certain amount.
  • When you’re done with the term of the loan (the term is the length of time you agree you’ll take to pay it back), the contract is over.

Examples of Credit That Isn’t a Loan

a woman uses a laptop computer to make an online payment with a credit card

Not all kinds of credit accounts are loans. Revolving credit, for example, is not the same thing as a loan. Two common examples of revolving credit are credit cards and lines of credit. If a company approves you for a credit card, they are extending you credit but not giving you a loan. Here are some differences:

A Loan Revolving Credit Such as a Credit Card
You get all the money at once. You use the money as you need it.
You pay in installments of a set amount. You must make at least a minimum monthly payment, but it’s not always the same. How much you must pay depends on how much of the credit you have used.
The loan is funded once and then you pay it back over time. You can draw repeatedly on a line of credit. As you pay it back, you can redraw up to your credit limit in a rotating door of borrowing and paying back.

Differences between Getting a Loan and Other Types of Credit

a pen sits on top of approved home equity line of credit paperwork

In general, there’s not a huge difference between getting a loan and getting other types of credit. You have to apply for both, and lenders of both types can consider the same factors when reviewing you for approval.

When applying for some loans, you may need to provide a reason. For example, you may want to apply specifically for a loan to purchase a vehicle or to consolidate your debt. But many personal loans don’t require reasons, allowing you to borrow money for any legal reason you want without disclosing what you’ll spend the money on.

The same is true for credit. If you want a line of credit for a business, for example, that’s different from a line of credit specifically for shopping at a certain retail store. But with a general credit card or home equity line of credit, you wouldn’t need to provide a reason or use your line of credit for certain types of purchases.

There’s also not a specific answer regarding which type of credit is easier to qualify for. It all depends on the lender, the amount of loan or credit you want and your own financial factors. There are credit cards and loans available only to people with good or excellent credit. At the same time, there are both credit cards and loans available to people with lackluster credit.

Understanding the Difference Between a Loan and Your Credit History

a person reviews credit history paperwork

A loan is also not the same thing as your personal credit or credit history. It is part of your credit history and can impact your credit score, though.

Once you take out a loan, the lender typically reports this to at least one of the credit bureaus. If you make timely payments on your loan, that’s reported as well. But the same is true if you miss payments or default on the loan.

Paying as agreed can impact your credit positively. Missing payments or defaulting on the loan impacts your credit negatively.

Apply for a Loan Today

a couple reviews paperwork with a loan officer

Whether you need money today for an urgent personal matter and you don’t have access to a line of credit or you want to work on building your credit by taking out a loan with a responsible lender and paying it back as agreed, Wise Loan can help. We report to the credit bureaus and strive to lend responsibly to help ensure our customers can make good financial choices for their future. If you are approved, you can receive instant funding, same-day funding, or next day funding.

Find out more about how we can help and apply for a loan from Wise Loan today.

The recommendations contained in this article are designed for informational purposes only.  Essential Lending DBA Wise Loan does not guarantee the accuracy of the information provided in this article; is not responsible for any errors, omissions, or misrepresentations; and is not responsible for the consequences of any decisions or actions taken as a result of the information provided above.

More information on Installment Loans and how they work in your state:

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