Consumer financing describes the general division of banking that deals with direct to consumer lending. This can include credit cards, mortgage loans, auto loans and personal lines of credit. People aren’t always clear on the details behind how this area of lending works, and they’re at a loss for how to navigate the murky waters of borrowing money. Whatever you need extra money for, the Frequently Asked Questions (FAQ) below should help you on the road to financial clarity.

What is the difference between loans and a personal line of credit?

A loan is a set amount of money lent to you by a bank all at once. You will agree to a fixed or variable interest rate and have a set repayment schedule. A personal line of credit typically has a cap, but it not necessarily dispensed to you all at once. Your bank will allow you access to the money and as you pay it back, that amount becomes available again. As you pay back a loan, your debt decreases and that money is no longer accessible. The other main difference between these two options is that you pay interest on the entire loan amount, whereas you’d only pay interest on the amount of the credit line that you use.

Which type of financing should I pursue?

If you need to make a sizable, one-time purchase, go for a loan. You’ll know exactly what it’s going to cost you and you won’t be tempted to continue using the money for other needs. A personal line of credit is a better option is you’re making ongoing purchases and cannot estimate exactly what you’ll need. Since using less money in this option will save you in interest, it’s a better option for you.

Do I have to offer collateral when I borrow?

It depends on the terms of the agreement. If you borrow money to purchase a vehicle, for example, that vehicle would be subject to repossession if you default on the loan. A personal line of credit can often be secured without collateral, but offering something up will often lower your potential interest rates and give you access to more funding.

How can I be sure I’ll be approved for financing?

It’s difficult to be completely sure. As the market fluctuates, banks change their criteria. The best way to remain a qualified borrower is to maintain good credit by keeping your debt to income ratio in check and paying your bills on time. Applying for credit with a financial institution with whom you already bank can also increase your chances of approval because they’ll have great insight into your financial habits.