Personal Loan vs Debt Consolidation vs Personal Line of Credit: What’s The Difference?

Getting a loan from a financial institution can be tricky for those unfamiliar with finance in general; since there are many different jargon and products and services that serve different purposes, it can be confusing to understand which is which fully.

Aren’t personal loans and cash loans the same? What is the difference between personal loans, debt consolidation loans, and personal lines of credit?

This article will go through the different types of unsecured loans and their benefits and drawbacks.

Secured vs Unsecured Loans

Before we understand the difference between personal loans, cash loans, debt consolidation loans, and personal lines of credit, we must first understand the difference between a secured loan and an unsecured loan.

Secured loans are a type of loan that requires both collateral, which is an asset (car, land, property, business assets etc.) that is tied to the loan that can be used to back up the repayment in case of a default, or a guarantor, which is a person responsible for repaying the debt if the borrower defaults.

Secured loans tend to have a lower interest rate than unsecured ones as there is collateral to back up the loan.

In contrast, unsecured loans are loans that do not require collateral and the financial institution loans the money solely based on your creditworthiness and ability to repay.

Unsecured loans tend to have a higher interest rate but are relatively more flexible in their processing and payment schemes.

There are four unsecured loans that we will talk about today: personal loan, cash loan, debt consolidation, and personal line of credit.

Personal Loan

Personal loans provide a fixed amount for a fixed tenure and monthly payment plan. Personal plans do not require any collateral since they are unsecured loans. Therefore, you can use them to borrow money for a lump sum such as education, wedding, house renovation and even for purchasing a vehicle. You do not have to justify the purpose of taking up the loan compared to business loans.

Since personal loans are the most straightforward loans to have, they are processed extremely quickly and easily; sometimes, loan processing takes less than 24 hours, and once there is final approval from the lender, the money will be deposited into your bank account immediately.

You can also use personal loans to improve your credit score if you repay your loans and interests on time.

This means that banks and financial institutions will be more willing to loan you in the future, providing better terms and rates. Personal loan interest rates tend to be lower than credit card debts.

However, personal loans have a relatively higher interest rates than secure loans. The average effective interest rate for personal loans in Singapore ranges from 11% to 14%, despite some of the best personal loans in Singapore offering effective interest rates of around 8-10%.

Personal loans are also one of the strictest when evaluating your credit score and worthiness since you have to be confident that you can pay your loans on time. Not repaying on time can lead to consequences such as a bad credit score which can greatly impact your ability to obtain a loan in the future.

Personal loans are suited for people who can pay on time, want a fixed repayment scheme and interest rate, and want to improve their credit score.

Cash/Payday Loan

A cash loan, also known as a payday loan, is a type of short-term loan that tags your next paycheck to borrow money when you need it. This means you can now borrow money for your needs and repay the loan with your subsequent wages via salary deduction. Cash loans are suitable for those who urgently need access to the funds and can pay them back with a portion of their salary.

Cash loans are typically used in emergencies, such as a car repair or medical expenses. Cash loans are easy to get and fast to receive; you also do not need an excellent credit score to apply for a cash loan.

Payday loans have an extremely high-interest rate of up to 23% for two weeks, they are also meant for short-term emergencies as the interest rates grow exponentially in a short period of time.

Debt Consolidation Loans

Debt consolidation loans are loans that consolidate all the different loans you have gathered into one place, meaning that instead of paying multiple debts, you only need to pay once a month. It is commonly used to pay off high-interest debts such as credit card debts.

Debt consolidation is suitable for those with good credit scores, who have high-interest debts such as personal loans and credit card debts, and who want a simplified repayment plan that they can follow religiously. It is not suitable for those with little to no debt.

Debt consolidation only works on unsecured loans or loans that do not have collateral. We have provided recommendations for debt consolidation loans depending on your situation, such as loans suitable for low income and loans that offer long tenures or colossal loan amounts.

Debt consolidation loans do not allow you to pay early or late, paying either too early or too late will result in a penalty of either a fixed amount like S$75, or a percentage of your outstanding balance/monthly payment, usually whichever is higher.

Personal Line of Credit (PLC)

Unlike a personal loan that loans you a lump sum of money upfront and requires you to pay fixed monthly payments throughout your loan term, a Personal Line of Credit (PLC) allows you to borrow as much cash as you need at any moment and repay it on your own timeline with a variable interest rate, giving it more flexibility than personal loans. They usually allow you to take up to 4-6x your monthly salary.

The benefits of PLCs are that there is flexibility in accessing those funds; you pay interest on what you borrow of a fixed lump sum; and it allows you to reuse the cash flows, meaning that you can borrow the total amount of funds once you pay back the PLC and abide by the terms of the lending agreement.

Despite the better flexibility of PLCs, they tend to have higher interest rates (roughly 12-30%) than their personal loan counterparts due to the variability of interest rates and payment periods.

There are also additional fees associated with PLCs, such as prepayment and maintenance fees. Lastly, you need a relatively high credit score to qualify for PLCs. Untimely repayment will also result in penalties and snowballing interest rates.

Depending on your situation, we have provided recommendations for PLCs, such as loans suitable for low-income and relatively short-term PLCs.

Conclusion

Despite the differences between the unsecured loan variants like personal loans, cash loans, debt consolidation and personal lines of credit, They all serve the same purpose of providing funds to people without collateral or assets to tie into their loans.

Check out our roundup of the best personal loans in the market to find the most suitable loan for you today!

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