Loans vs. Lines of Credit

Financial Education > Loans vs. Lines of Credit

May 7, 2021

Credit Unions, Banks and other financial institutions offer many lending products wherein the customer borrows money and agrees to pay it back with interest.  Non-Revolving Loans and revolving lines of credit are two such products. Approval decisions can be based on the purpose(s) for which the funds are borrowed, the credit history of the borrower, requirements for collateral and debt to income ratios. This blog post explores a few primary differences between the two.

Non-revolving loans are what many of think of when we consider a mortgage loan to buy a home or an auto-loan for the purchase of a new car.  When non-revolving is used to describe a loan, the full amount of the loan is granted on a one-off basis and the funds are fully disbursed to the borrower.  Generally, the borrower will make payments consisting of principal and interest until the debt is paid off.   Once the initial disbursement of funds is made, no additional loan proceeds will be given to the borrower.  

Revolving lines of credit are also loans but operate differently from their non-revolving counterpart.  When the lender approves a line of credit, the full amount of the credit facility is available to the borrower, but the borrower is not required to take out any loan proceeds.  In practical terms, a line of credit operates in a very similar fashion to a credit card.   There are some differences from a credit card, however.  For example, a Line of Credit will often have a draw period measured in a number of years.  During this time, the borrower can draw on the line of credit, pay interest, pay back principal, and draw on the line again.  Once the draw period is complete, any amount remaining owed by the borrower converts to a non-revolving loan, any available line of credit is extinguished at that time.  Unlike non-revolving loans, lines of credit such as personal line of credit or a Home Equity Line of Credit (HELOC) can be used for any purpose at any time.   

Consumers will find that financial institutions offer both secured and unsecured Lines of Credit and non-revolving loans. The difference: secured loans require collateral such as a mortgage or car; unsecured loans rely on only the credit worthiness of the borrower to insure repayment.