January 12, 2023

Understanding The Difference Between a Line of Credit and a Loan

a wooden house passed between two people

Just because people need financial assistance doesn’t mean they all need the same type. There are huge differences between different forms of help you can avail yourself of.

Burke Financial is proud to work carefully and closely with clients, so we can understand their situation and the types of goals they have in mind for their finances and lifestyle. From there, we give impartial expert advice that sets people on the optimal path.

However, it helps to know a few general principles before delving deeper into the weeds. Please read on to learn the important differences between a line of credit and a loan.

What Exactly is a Line of Credit?

In short, a line of credit is defined as a bank or other lending institution giving a customer access to an open-ended, revolving loan. The lending institution limits the funds they can access at a time based on several factors, such as their perceived ability to repay, income level, credit score, and more.

As the line of credit is repaid, the borrower can take more money out as needed. Just because a person has approved access to funds doesn’t mean they have the funds in their account. There are potential downsides: failure to make repayments can result in heavy penalties, and the interest rate on a line of credit may be high.

However, that depends on what the line of credit is staked against. Burke Financial is proud to offer clients a home equity line of credit, or HELOC, because nothing signals reliability to lending institutions like home ownership. As such, we’re able to secure excellent interest rates and generous, flexible terms for homeowners of all income, credit, and debt levels.

Like with any financing, there are risks, but it’s easy to avoid them so long as you’re prudent. While borrowers are free to use the funds however they please, most experts recommend using them for truly essential things or for sensible investments that will offset the borrowing costs.

For example, you can take out a home equity line of credit and spend the money on a luxury car or a first-class vacation. But then you’ll have to pay for not just these big-ticket items but the costs of financing, raising the price of something already expensive even higher.

In contrast, if you borrow money to invest in something that will give you a return on what you pay, you may offset the borrowing costs entirely and end up making money.

That’s why people often take out HELOCs to cover home repairs or home renovations. Tapping into your home’s equity is a popular and reliable way to pay to improve where your living quarters because, if done properly, you can offset the costs or even recoup them and then some.

How do Loans Work?

Taking out a loan is quite different! With loans, the lender transfers a given sum of money to the borrower, who must then repay it over a specific time and with certain conditions. In other words, the money doesn’t sit in an account waiting for you to access it, should you desire — it’s already in your account.

People use private mortgage loans for a range of reasons, but like a HELOC, it lets you tap into your home’s equity to free up funding you need when you need it. Because the borrower receives one lump sum of money, a loan is perfect for times when you know you’ll need a specific amount.

For example, if your contractor has submitted an invoice for work they’ve done, you may prefer a home equity loan to a HELOC, so long as this is the only expense for which you’ll need the money. For longer projects with unpredictable budgets, it may make more sense to opt for a HELOC.

a financial advisor explains a document to a couple inside a new home

Loans and lines of credit can be approved as quickly as 24 hours, so you get the money when it’s needed. Leveraging your home when borrowing money gives you, well, more leverage during the process. You’ll get better rates sooner.

What’s Better?

Rather than think about which of the two options is better, it makes more sense to think about it holistically. What is right for you? The answer depends on your specific circumstances at the time.

You may have one answer today and another a year from now. The experienced, professional mortgage brokers at Burke Financial listen carefully to your needs until they fully understand them, then apply their knowledge and industry contracts, so they best serve you.

We can help with refinancing a home mortgage loan, so you’re better served by your existing loan. Whatever the trouble is, Burke Financial has a solution that will work. Many people tap into their home’s equity to rehabilitate their personal finances by opting for debt consolidation loans.

Often, juggling multiple debts can be not only expensive but difficult to manage. If you lose track of debt, it will only grow. Burke Financial has helped countless Ontarians regain their fiscal footing by bundling several sources of debt into one.

We simplify the process greatly but also save you money! As consumer goods and services get more expensive, you can’t really opt out of the essential things you need in life to survive and thrive. If you’re a homeowner looking to free up cash to make an investment, pay for emergency repairs or home improvement, or get your finances healthy again, the experts at Burke Financial are happy to walk you through your options.

Not every financial lifeline looks the same. Repaying a loan has different implications than getting a line of credit back to even. The processes and potential penalties are different, as are the situations you’re responding to. You don’t need to know the ins and outs of financing to get the money you need to breathe easy, so long as you get loan solutions from experienced experts who truly have your back.


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