When facing a financial need, many borrowers wonder whether to opt for a personal loan or a credit line (overdraft facility). Both options provide access to funds for various expenses, but they work in different ways.
A personal loan gives you a fixed amount upfront with a structured repayment plan, whereas a credit line allows you to borrow as needed within a pre-approved limit, paying interest only on the amount used.
So, how do you decide which one is right for you? In this blog, we’ll compare personal loans and credit lines, exploring their differences, advantages, and ideal use cases. Plus, we’ll provide expert tips from RupeeQ to help you make an informed choice.
Understanding Personal Loans and Credit Lines
Let’s delve deep into understanding both of these credit tools:
What is a Personal Loan?
A personal loan is a lump sum loan provided by banks, NBFCs, or online lenders for purposes like home renovations, medical expenses, or travel.
- Loan amount: ₹50,000 to ₹40 Lakhs
- Interest rate: 10% – 24% per annum
- Tenure: 1 to 5 years
- Fixed EMIs and structured repayment schedule
Example:
Rohit needed ₹5 Lakhs for a wedding. He took a personal loan at 12% interest for 3 years, repaying it in fixed EMIs of ₹16,606 per month.
What is a Credit Line?
A credit line (or overdraft facility) is a revolving loan where you get a pre-approved credit limit and can withdraw money as needed.
- Credit limit: ₹50,000 to ₹25 Lakhs
- Interest rate: 12% – 24% per annum
- Interest charged only on the amount used
- Flexible repayment, with no fixed EMIs
Example:
Megha had a credit line of ₹5 Lakhs for business expenses. She withdrew ₹1 Lakh and repaid it within 3 months, paying interest only for those 3 months instead of the full amount.
RupeeQ Tip: If you need funds for a one-time expense, a personal loan is better. If you require flexible borrowing, a credit line is more convenient.
Key Differences Between a Personal Loan and a Credit Line
| Feature | Personal Loan | Credit Line |
| Loan Amount | Fixed lump sum | Flexible, within a pre-approved limit |
| Interest Payment | Charged on full loan amount | Charged only on amount used |
| EMI Structure | Fixed monthly EMIs | Flexible repayment, no fixed EMIs |
| Usage | One-time expense (wedding, medical, travel) | Ongoing expenses (business, emergencies) |
| Tenure | 1 – 5 years | Revolving (no fixed tenure) |
| Approval Process | Requires application for each loan | One-time approval, borrow as needed |
| Best For | Large planned expenses | Short-term cash flow needs |
When Should You Choose a Personal Loan?
A personal loan is a better choice when:
1. You Need a Large Amount for a One-Time Expense
Personal loans are ideal for major expenses, such as:
- Home renovation
- Medical bills
- Education expenses
- Debt consolidation
Example:
Amit wanted to renovate his home and needed ₹8 Lakhs. A personal loan helped him fund the project, with structured EMIs over 4 years.
2. You Prefer Fixed Repayments
If you like predictable EMIs and a clear repayment plan, personal loans provide stability.
Example:
Neha took a ₹3 Lakh personal loan at 10% interest for a vacation, repaying it in 12 equal EMIs of ₹26,500.
When Should You Choose a Credit Line?
A credit line is a better choice when:
1. You Have Ongoing or Uncertain Expenses
If you don’t know the exact amount you’ll need, a credit line offers flexibility.
Example:
Raj runs a small business. Instead of taking a ₹5 Lakh loan, he used a credit line and withdrew only ₹1 Lakh, reducing unnecessary interest costs.
2. You Want to Pay Interest Only on What You Use
With a credit line, interest is charged only on the borrowed amount, not the total limit.
Example:
Priya had a ₹2 Lakh credit line but used only ₹50,000. She paid interest on ₹50,000, not the full ₹2 Lakh.
3. You Need Quick Access to Funds
Once approved, you can withdraw funds anytime without reapplying.
Example:
Vikram used his credit line for emergency hospital bills without waiting for a personal loan approval.
RupeeQ Tip: A credit line is great for managing cash flow, while a personal loan works best for planned expenses with structured repayments.
Which One Is More Cost-Effective?
The cost-effectiveness of personal loans and credit lines depends on how much you borrow and for how long.
| Scenario | Personal Loan (12% interest, 3-year tenure) | Credit Line (14% interest, used for 6 months only) |
| Loan Amount | ₹5,00,000 | ₹5,00,000 limit, but only ₹1,50,000 used |
| Interest Paid | ₹97,791 over 3 years | ₹10,500 for 6 months (only on ₹1.5 Lakhs) |
| Monthly EMI | ₹16,606 | Flexible repayment, no fixed EMI |
| Best Option | Best for structured repayment | Best for short-term needs |
Key Takeaway:
- A personal loan is cheaper for large, long-term expenses.
- A credit line is more cost-effective for short-term or small withdrawals.
Common Mistakes to Avoid When Choosing Between a Personal Loan and a Credit Line
Taking a Credit Line Without a Clear Plan
A credit line can lead to overspending if not used wisely.
Tip: Withdraw only what you absolutely need to avoid high interest costs.
Taking a Personal Loan for Small, Short-Term Expenses
If you only need a small amount for a short time, a credit line is a better option.
Tip: A personal loan is ideal if you need structured, long-term financing.
Not Checking Eligibility Before Applying
Applying for multiple loans can reduce your credit score.
RupeeQ Tip: Check your eligibility for both personal loans and credit lines using RupeeQ before applying to avoid unnecessary rejections.
Final Thoughts: Which One Should You Choose?
- Choose a Personal Loan If:
✅ You need a large amount for a one-time expense.
✅ You prefer fixed EMIs and structured repayment.
✅ You want lower interest rates on long-term loans. - Choose a Credit Line If:
✅ You need flexibility for unpredictable expenses.
✅ You want to pay interest only on what you borrow.
✅ You need quick access to emergency funds.
By understanding your financial needs and repayment capacity, you can select the best option.
