THERE are two types of personal loans: term loans, and lines of credit. Both are useful, but the structure and pricing are different. Which is better depends on how you intend to use the money.
Term loans are for a specific period, like one to five years. These loans are not overly expensive and the rules are clear-cut on whether you qualify and exactly how much you can borrow.
The general guideline is you can borrow four times your monthly salary if you earn between $2,500 and $10,000 per month and have no rollover debt on your credit cards.
The major downside to these loans is they are tricky. It's because of the way the interest rates are quoted. Banks use a "flat" rate of interest to make the loans appear cheaper than they really are.
When I say "appear cheaper", I mean much cheaper, like half of what you really pay, called the "effective interest rate" or EIR. This is explained elsewhere on the page.
Lines of credit are the second type of personal loan. Their big advantage is they allow you to pay down or pay off your loan at any time. You can later re-activate it when you need the money again.
If you like, you can borrow $10,000 for a week and then pay it off. Whenever the balance owed is $0, no interest is charged. A month later, you can re-borrow the $10,000 or any other amount up to your line of credit limit.
It is the perfect loan for short-term cash needs. By contrast, a term loan requires that you borrow the money for the full term of one to five years with a penalty for early repayment.
The downside to the line of credit is its higher interest rate, but it need not be more expensive if you don't borrow for extended periods.
If you borrow infrequently and keep a $0 balance most of the time, it is less expensive than a term loan.
