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When comparing a personal loan vs. a personal line of credit, both sources of funding can be used for a variety of expenses and typically require a hard credit check during the application process. However, there are also differences: specifically, in how the loan funds are disbursed to the borrower and how the credit is repaid.

Here, learn more about deciding whether a personal loan or a personal line of credit might be right for you.

What Is a Personal Line of Credit and How Does It Work?

A personal line of credit (LOC) is a type of revolving credit similar to a credit card. But funds are typically accessed by writing checks provided by the lender or requesting a funds transfer to your checking account instead of by using a card.

An LOC typically allows the borrower to withdraw funds repeatedly, up to the credit limit. Any funds that are withdrawn are subject to repayment with interest. When they are repaid, they can be accessed again up to your particular credit limit. There may be a limit on the number of years the line of credit is available.

Additional points to know:

•   Some lenders may assess fees associated with an LOC. There may be a maintenance charge for inactive accounts. There may also be ongoing fees, monthly or annual, even if the LOC is being used. Some other expenses may include application fees, check processing fees, and late fees, among others. It’s important to be aware of any potential fees before you sign an LOC agreement.

•   Personal lines of credit are usually unsecured, although you may be able to put up collateral to get a lower interest rate. A home equity line of credit, or HELOC, is an example of a secured line of credit.

•   Typically, a personal LOC will be offered by a bank or credit union, and you might have to have another account with the lending institution to be considered for an LOC.

•   If your LOC is unsecured, the interest rate will probably be variable, which means it could go up or down during the loan’s term, and your payments could vary. But you’ll only be charged interest on the amount you withdraw. If you’re not using any LOC funds, you won’t be charged interest.

If you expect to have ongoing expenses or if you have a big expense (like a wedding or home renovation) but don’t know what your final budget will be, this type of borrowing might be a useful financial tool.

A personal LOC also may be the right fit if you need some flexibility with your borrowing. For example, self-employed workers who know they’ll be paid by a client but aren’t sure exactly when, can tap into their line of credit to pay expenses while they wait. They can pay that money back when they receive payment from the client, and they won’t have to use high-interest credit cards or borrow from other savings to make ends meet.

Of course, there are downsides to that easy-to-access money. Here’s a closer look:

•   Since unsecured lines of credit are considered by lenders to be riskier than their secured counterparts, it can be more difficult to qualify at a favorable interest rate.

•   Once you have access, it may be tempting to use the funds for purposes other than originally planned. Keeping in mind the intended purpose for the funds may help you stick to it and not use the funds for other purchases.

Pros and Cons of Personal Lines of Credit

Having funds that can be accessed as needed can be helpful. But there are also some drawbacks to consider. Take a look at how the pros and cons stack up for personal lines of credit.

Pros of Personal Lines of Credit

•   Easy access to funds.

•   Open-ended vs. set distribution of money.

•   Minimal limits on use of funds.

•   Can be useful for ongoing expenses.

Cons of Personal Lines of Credit

•   May have a higher interest rate than other forms of credit.

•   Typically are unsecured, so may be more difficult to qualify for than other forms of credit.

•   Interest rate could be variable, presenting a budgeting challenge.

•   Ease of access can be tempting to use for impulse shopping.

What Is a Personal Loan and How Does It Work?

A personal loan, on the other hand, is a fixed amount of money disbursed to the borrower in a lump sum. If the loan has a fixed interest rate, as is typical for personal loans, the payments are in fixed installments for the term of the loan. If the loan has a variable interest rate, the monthly payments may fluctuate as the interest rate changes in accordance with market rates.

Because personal loans typically have lower interest rates than credit cards, they’re often used to pay off other debts such as home and car repairs or medical bills, or to consolidate other higher-interest debts such as credit card balances into one manageable — and potentially lower — monthly payment.

Here are some more ways these loans are often used:

•   A personal loan can be a helpful tool for debt consolidation. If you can qualify for a personal loan that has a lower interest rate than your other outstanding debts, you may be able to save money in the long run by consolidating those debts. In order for this financial strategy to work, it’s important to stop using the old sources of credit to avoid going deeper into debt.

•   A personal loan also could be a suitable choice for paying for a wedding or home renovation. But it’s important that you feel confident about being able to repay the loan on time and in full. If you don’t responsibly manage a personal loan — or any kind of debt, for that matter — your credit can be adversely affected.

•   You can apply for a secured or unsecured personal loan. A secured loan, which is backed by collateral, is typically considered less of a risk by lenders than an unsecured loan is. Collateral is an asset the borrower owns — a vehicle, real estate, savings account, or other item of value. If the borrower fails to repay a secured loan, the lender has the right to take possession of the asset that was put up as collateral.

Here are a few more points about how the process of getting a personal loan can work:

•   An applicant’s overall creditworthiness will be considered during the approval process. Generally, an applicant with a higher credit score will qualify for a lower interest rate, and vice versa.

•   Some lenders charge personal loan fees such as origination fees or prepayment penalty fees. Before signing a loan agreement, it’s important to be aware of any fees you may be charged.

Pros and Cons of Personal Loans

When you need a set amount of money for an expense, a personal loan can be a good choice. Along with the benefits of using this financial tool also come a few drawbacks to consider.

Pros of Personal Loans

•   May be a good choice for large, upfront expenses.

•   Typically have fixed interest rates.

•   Steady payments may be easier to budget for.

•   May have a lower interest rate than credit cards.

Cons of Personal Loans

•   Unsecured personal loans may have higher interest rates than other forms of secured credit.

•   May need a higher credit score to qualify for lower interest rates.

•   If not used responsibly, it can add to a person’s debt load instead of alleviating it.

•   May have fees.

Major Differences Between Personal Lines of Credit and Personal Loans

When you’re looking for the right source of funding for your financial needs, it can help to compare different types. Here are some specifics to consider when looking at personal LOCs and personal loans.

Considering the Type of Debt

When you’re thinking about applying for a personal LOC or a personal loan, it’s important to consider the effect borrowing money can have on your credit score. If you borrow money without a repayment plan in place, you could run into trouble no matter which borrowing option you go for. But each is looked at differently by the credit bureaus.

A personal LOC is revolving debt, which means it will factor into your credit utilization ratio — how much you owe compared to the amount of credit that’s available to you. This can count as the second most weighty factor (at 30%) toward your score.

For a FICO® Score, keeping your total credit utilization rate below 30% is recommended. That means if your credit limit is $15,000, you would use no more than $4,500.

•  Using a large percentage of your available credit can have a negative effect on your credit score. And lenders may see you as a high-risk applicant because they may assume you’re close to maxing out your credit cards.

•  Using a small percentage of your available credit can work in your favor. If your credit utilization ratio is low (under 10%), it signifies to potential lenders that other lenders have determined you to be a good risk, but you don’t need to use the credit that’s been extended to you.

•  Having a low credit utilization rate by using just a little of your available credit could actually have a more positive effect on your credit score than not using any of it at all. Lenders generally look for signifiers of a healthy relationship with credit.

A personal loan is installment debt and isn’t considered in your credit utilization ratio. In fact, if you pay off your revolving debt with a personal loan, it potentially can lower your credit utilization ratio and have a positive effect on your credit score. A personal loan also can add some positive variety to your credit mix — something else that’s calculated into your credit score.

Personal LOC or Personal Loan: Which Is Right for You?

Before you decide to take out a line of credit or a personal loan, it’s wise to compare lenders. Look at the annual percentage rate and whether it’s fixed or variable. You can also take into account any fees you might have to pay, including origination fees, annual fees, access fees, prepayment penalties, and late payment fees.

Estimating the total cost of the loan until it’s paid in full, including the principal loan amount, interest owed, and any fees or penalties you could potentially be charged, will help you figure out how much the loan will actually cost you.

You might use an online personal loan calculator to help you assess these total costs.

The Takeaway

Deciding when and how to borrow money can be a tough decision. Personal loans and personal lines of credit each have their pros and cons. Personal lines of credit allow you to borrow up to a credit limit, while personal loans disburse a lump sum. Interest rates, fees, and other features may vary. It’s wise to consider your needs and options carefully, reading the fine print on possible offers.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is it better to get a loan or use a line of credit?

Loans can be better suited for fixed expenses or one-time needs, while lines of credit can offer flexibility for repeated borrowing. Loans often carry lower interest rates but may involve higher upfront fees; lines of credit, on the other hand, may cost more over time due to variable rates and fees.

What are the downsides of a line of credit?

The interest rates for a personal line of credit may be higher than those charged on other sources of funding, and if the rate is variable, that can make budgeting more difficult. Also, there can be fees, such as an annual or monthly maintenance fee and transaction fees.

Does a line of credit hurt your credit score?

A line of credit can involve a hard credit pull when you apply, which can temporarily lower your credit score by several points. After that, how you manage your line of credit can determine how your credit score is impacted. Keeping your usage low and always paying on time can help build your score. Taking on too much debt and missing your payment due dates can lower your score.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-038

Both co-ops and condos give a resident the right to use certain common areas, such as pools, gyms, roof decks, and courtyards. But there are big differences when it comes to what you actually own when you purchase a condo vs a co-op.

It’s easy to get confused about the difference between the two properties. If you pulled up pictures of co-ops and condos during a home search, they might seem exactly the same. But if you’re in the market for a home — especially in a large city where both housing types are popular — you’ll learn quickly that the terms are not interchangeable.

You might have wondered if you’d prefer a house or a condo. But if you’re moving in the direction of co-op vs. condo, it’s important to understand their many distinct features. You’ve done the work of budgeting for a home. Now, before you spend that budget, let’s get a handle on the difference between a condo and a co-op.

What Is a Condo?

With a condominium, you own your home, but you don’t solely own anything outside your unit — not even the exterior walls. Common areas of the complex are owned and shared by all the condo owners collectively.

Buying a condo is not all that different from securing any other type of real estate. Typically, the complex will be managed by an association that is responsible for maintaining the property and enforcing any covenants, conditions, and restrictions that govern property usage. The association sets the regular fees owners pay to cover repairs, landscaping, other services, and insurance for the shared parts of the property. Special assessments also might be levied to pay for unexpected repairs and needed improvements that aren’t in the normal operating budget.

What Is a Co-op?

In the co-op vs. condo debate, it’s key to know that with a housing cooperative, residents don’t own their units. Instead, they hold shares in a nonprofit corporation that has the title to the property and grants proprietary leases to residents. The lease grants you the right to live in your specific unit and use the common elements of the co-op according to its bylaws and regulations. A co-op manager usually collects monthly maintenance fees; enforces covenants, conditions and restrictions; and makes sure the property is well kept.

As a shareholder, you become a voting manager of the building, and as such have a say in how the co-op is run and maintained. Residents generally vote on any decision that affects the building. Should a resident wish to sell their shares, members of the board of directors will have to approve the new buyer. They will be much more involved than would be the case with a condo. That can make it a lengthy process.

Co-ops and condos are both common-interest communities, but their governing documents have different legal mechanisms that determine how they operate and can affect residents’ costs, control over their units, and even the feeling of community. (If you’re curious about another option, there’s always a townhouse, so read up on the difference between a condo and a townhouse as well.)


💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

Some Pros & Cons of Co-Ops vs. Condos

Financing

It’s important to drill down on the details of buying an apartment. Because you aren’t actually buying any real estate with a co-op, the price per square foot is usually lower than it would be for a condo. Eligibility for a home loan may depend on credit score, down payment, minimum square footage of a unit, and more.

However, it might be somewhat harder to get a mortgage for a co-op than a condo, even if the bottom-line price is less. It might not have all that much to do with you. Some lenders are reluctant to underwrite a loan for shares in a corporation vs. real property. Most condo associations don’t restrict lending or financing in the building. If you can get a mortgage loan, the condo association will usually let you buy a place.

Fees

Because a co-op’s monthly fee can include payments for the building’s underlying mortgage and property taxes as well as amenities, maintenance, security, and utilities, it’s usually higher than the monthly fee for a condo. Either way, though, generally the more perks that come with your unit, the more there is to maintain and in turn, the more you’re likely to pay.

If you’re concerned about an increase in fees, you might want to ask the association or board about any improvements that may lead to an increase in the future — and what the rules are for those who do not pay their assessed dues. All of these factors are important to weigh when you’re making a home-buying checklist, which includes figuring out how much money you’ll need and the best financing strategy.

Taxes

If you itemize on your income tax return, you may be able to deduct the portion of a co-op’s monthly fee that goes to property taxes and mortgage interest. However, none of a condo’s monthly maintenance fee is tax deductible. You might want to consult a tax professional about these nuances before moving forward with a co-op or condo purchase.

Privacy vs. Community

If you’ve ever lived in one of those neighborhoods where the only time you saw your fellow residents was just before they pulled their cars into their garages, it could take you a while to adjust to cooperative or association living. Because you share ownership with your neighbors, you may be more likely to see them at meetings and other events. And you can trust that they’ll know who you are.

Co-op boards often require prospective buyers — who are potential shareholders — to provide substantial personal information before a purchase is approved, including personal tax returns, personal and business references. Many require in-person interviews. You may find that you like the sense of community and that everyone knows and looks out for each other. Or you may not. Again, you might want to ask some questions about socialization and privacy while checking out a particular co-op or an active condo community.

Restrictions

In a co-op, you might run into more rules regarding how you can renovate or even decorate your unit. And don’t forget: You’ll also have to deal with that rigorous application approval process if you ever decide to sell.

Both condos and co-ops frequently have restrictions on renting out extra rooms (or renting the entire unit), as well as on how many people can stay overnight or park in the parking lot, the type of pets you can have and their size, and more. Before you look at a unit, you may want to ask your agent about covenants, conditions, and restrictions that could be difficult to handle.

The Takeaway

Whether you end up buying a co-op or a condo, ownership offers many benefits you won’t find in a rental. When you’re ready to start a serious search, take the time to look for a lender that will work with you on whatever type of loan you might require. In the co-op vs. condo terrain, there are specialists for both sides.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Is a co-op better than a condo?

A co-op isn’t better than a condo. Which is best really depends on your lifestyle and needs. Co-ops can be a little harder to finance, and board approval of a prospective co-op buyer is often needed. But a plus for co-ops is that the portion of your maintenance fee that goes toward property taxes may be tax deductible.

What’s the downside to owning a co-op?

Some co-op owners who are selling their unit find that the screening of a prospective buyer by the co-ops management board can slow down the sale process. Co-ops may also be less flexible when it comes to decorating or renovating the unit.

Is a co-op the same as a condo?

Both co-ops and condos are often apartments, but that’s where the similarity ends. When you purchase a co-op, you technically aren’t buying the apartment itself, but rather shares in the corporation that owns the building. When you buy a condo, you are buying your unit and you share ownership of the common areas of the building with your neighbors. Co-ops usually involve a screening process in which buyers are reviewed and approved by their prospective neighbors. Condos don’t usually require this.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q425-166

Buy to open and buy to close are options orders used by traders in order, as the names suggest, to open new options positions or to close existing ones.

Investors use a “buy to open” order to initiate a long call or put option, anticipating that the option price may move in their favor. On the other hand, traders who want to exit an existing short options contract may use a “buy to close” order.

What Is Buy to Open?

“Buy to open” is an order type used in options trading, similar to going long on a stock. In options trading, you can buy to open a call if you expect the price to rise, which is a bullish position, or you may buy to open a put, which is taking a bearish position. Either way, to buy to open is to enter a new options position.

Buying to open is one way to open an options position. (The other is selling to open.) When buying to open, the trader uses either calls or puts and speculates that the option itself will increase in value — that could be a bullish or bearish outlook depending on the option type used. Buying to open sometimes creates a new option contract in the market, so it may increase open interest if the trade is matched with a seller opening a new position.

A trader pays a premium when buying to open. The premium paid, also called a debit, is withdrawn from the trader’s account in a manner that’s similar to buying shares.

Recommended: Popular Options Trading Terminology to Know

Example of Buy to Open

If a trader has a bullish outlook on XYZ stock, they might use a buy to open options strategy. To do that, they’d buy call options. The trader must log in to their brokerage account, and then go to the order screen. When trading options, the trader has the choice of buying to open or selling to open.

Buying to open can use either calls or puts, and it may create a new options contract in the market. As noted earlier, buying to open calls is a bullish position, while buying to open puts is a bearish position.

Let’s assume the trader is bullish and buys 10 call contracts on XYZ stock with an expiration date of January 2025 at a $100 strike price. The order type is “buy to open” and the trader also enters the option’s symbol along with the number of contracts to purchase. Here is what it might look like:

•   Underlying stock: XYZ

•   Action: Buy to Open

•   Contract quantity: 10

•   Expiration date: January 2025

•   Strike: $100

•   Call/Put: Call

•   Order type: Market

A trader may use a buy to open options contract as a stand-alone trade or to hedge existing stock or options positions.

Profits can potentially be substantial with buying to open. Going long calls features unlimited upside potential while buying to open puts has a maximum profit when the underlying stock goes all the way to zero. Buying to open options carries the risk that the options will expire worthless, however.

What Does Buy to Close Mean?

Buying to close options are used to exit an existing short options position and may reduce the number of contracts in the market. Buying to close is an offsetting trade that covers a short options position. A buy to close order occurs after a trader writes an option.

Writing options involves collecting the option premium — otherwise known as the net credit — while a buy to close order debits an account. The trader is attempting to profit by keeping as much premium as possible between writing the option and buying to close. The process is similar to shorting a stock and then covering.

Example of Buy to Close

Suppose a trader opened a position by writing puts on XYZ stock with a current share price of $100. The trader expected the underlying stock price would remain flat or rise, so they entered a neutral to bullish strategy by selling one options contract. A trader might also sell options when they expect implied volatility will drop.

The puts, with a strike of $100, expiring in one month, brought in a credit of $5 per share (an options contract typically covers 100 shares).

The day before expiration, XYZ stock trades relatively close to the unchanged mark relative to where it was a month ago; shares are $101. The put contract’s value has dropped sharply since the strike price is below the stock price and because there is so little time left until the expiration date. The trader may realize a profit by buying to close at $1 the day before expiration.

The trader sold to open at $5, then bought to close at $1, resulting in a $4 profit per contract ($400 at 100 shares per contract).

Differences Between Buy to Open vs Buy to Close

There are important differences between a buy to open vs. buy to close order. Having a firm grasp of the concepts and order type characteristics is important before you consider trading.

Understanding Buy to Open and Buy to Close

Let’s dive deeper into the techniques and trading strategies for options when executing buy to open vs. buy to close orders.

Buy to Open Call

Either calls or puts may be used when constructing a buy to open order. With calls, a trader usually has a bullish outlook on the direction of the underlying stock. Sometimes, however, the trader might speculate based on movements in other variables, such as volatility or time decay.

Buying to open later-dated calls while selling to open near-term calls, also known as a calendar spread, is a strategy that may be used to attempt to benefit from time decay and higher implied volatility. Buying to open can be a stand-alone trade or part of a bigger, more complex strategy.

Buy to Open Put

Buying to open a put options contract is a bearish strategy when done in isolation, since profit potential comes from a decline in the underlying stock’s price. A trader commonly uses a protective put strategy when they are long the underlying stock. In that case, buying to open a put is simply designed to protect gains or limit further losses in the underlying stock. This is also known as a hedge.

A speculative trade using puts is when a trader buys to open puts with no other existing position. The trader executes this trade when they anticipate that the stock price will decline. Increases in implied volatility may also benefit the holder of puts after a buy to open order is executed.

Buy to Close

A buy to close order completes a short options trade. It can reduce open interest in the options market whereas buying to open can increase open interest. The trader may profit when buying back the option at less than the price they sold it for.

Buying to close occurs after writing an option. When writing (or selling) an option, the trader seeks to take advantage of time decay. That can be a high-risk strategy when done in isolation — without some other hedging position, there could be major losses. Writing calls has unlimited risk since the stock could theoretically continue to rise, while writing puts has substantial risk as the underlying stock can fall all the way to zero. So, a writer may use a buy-to-close order to close a position and limit losses when the price of stock is moving against them.

Shorting Against the Box

Shorting against the box is a strategy in which a trader has both a long and a short position on the same asset. This strategy may allow a trader to maintain a position, such as being long a stock.

Tax reasons often drive the desire to layer on a bearish options position with an existing bullish equity position. Selling highly appreciated shares can trigger a large tax bill, so a tax-motivated approach does not involve shorting against the box; that strategy is no longer permitted for tax deferral under the Taxpayer Relief Act of 1997, which classifies such offsets as constructive sales. A more common modern alternative is using buy-to-open puts for downside protection. Not all brokerage firms allow this type of transaction. Also, when done incorrectly or if tax rules change, the IRS could determine that the strategy is effectively a sale of the stock that may require capital gains payments and, under current U.S. tax law, entering an offsetting short position is treated as an immediate constructive.

Recommended: Paying Taxes on Stocks: Important Information for Investing

Using Buy to Open or Buy to Close

A trader must decide if they want to go long or short options using puts or calls. Buying to open may generally be used to seek profits from large changes in the underlying stock while selling to open often involves attempting to take advantage of time decay. Traders often place a buy to close order after a sell to open order executes, but they might also wait with the goal of the options potentially expiring worthless.

Another consideration is the risk of a margin call. After writing options contracts, it’s possible that the trader might have to buy to close at a steep loss or be required to liquidate positions by the broker. The broker could also demand more cash or other assets be deposited to satisfy a margin call.

The Takeaway

Buy to open is a term that describes when an options trader establishes a long position. Buy to close is when a short options position is closed. Understanding the difference between buy to open vs. buy to close is crucial to options trading. These option orders allow traders to put on positions to fit a number of bullish or bearish viewpoints on a security.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

FAQ

What is the difference between buy to open and buy to close options?

Buy to open means a trader enters a new long options position by purchasing a call or put contract. Buy to close means exiting an existing short options position by purchasing it back.

What is the most successful option strategy?

There is no single “most successful” strategy. An options approach’s effectiveness may depend on the market environment, the trader’s outlook, and risk management practices.

Is it better to buy at open or close?

There is no universal rule on whether it’s better to buy options at the market’s open or close. Traders often consider liquidity, volatility, and bid–ask spreads.

Is it better to buy options that are ITM or OTM?

In-the-money (ITM) and out-of-the-money (OTM) options each have trade-offs. ITM contracts cost more but have intrinsic value, while OTM options are cheaper but riskier because they require larger price moves to be profitable.