Loan

One lump sum that you repay with principal and interest for a set period of time.


“When people refer to a loan, they typically mean an “installment” or “term” loan. When you take out an installment/term loan, the lender will give you a lump sum of money that you must repay with interest in regular payments (consisting of interest and principal) over a period of time. Many loans are amortized, which means that each payment will be the same amount. For example, let’s say you take out a $10,000 loan with a 5% interest rate that you will repay over three years. If the loan is amortized, you will repay $299.71 each month until the loan is repaid after three years.” 1


Line of Credit

The option to borrow and pay back money repeatedly. You are charged interest only on what you borrow.


“A line of credit is a revolving account that lets borrowers draw and spend money up to a certain limit, repay this money (usually with interest) and then spend it again. The most common example of this is a credit card, but other types of lines of credit, such as home equity lines of credit (HELOC) and business lines of credit, exist.” 1



Example of a Loan & a Line of Credit


As an investor, when you lend out money on a social lending platform, you are providing an installment or term loan. The loan is amortized, so the borrower will make equal payments for a specific amount of time (36 months, 60 months, etc…). If the borrower ever wanted to take out more money, they would need to apply for a brand new loan.


If you borrow the money to make the investment above from a line of credit, you will pay interest to the bank for the amount you borrowed. There is no time limit, and so you are free to pay back the bank as fast or slow as you would like (most lines of credit from a bank have an expiration date of at least 1 year). At any point in time, you can borrow more money from the line of credit as long as there is still room on it.



1.  https://www.valuepenguin.com/loans/loan-vs-line-of-credit