Term loan or line of credit for the same amount of money

You need $75,000. One lender offers a four-year term loan, another offers a revolving line with the same limit. The interest rate on the line is a point higher. Choosing on that basis will be right about half the time and wrong the other half, because the two products charge for different things.

A term loan charges you for the whole amount for the whole term, whether or not you need it. A line charges you only for the days a balance is outstanding, plus fees for the availability you are not using.

Illustrative only — three usage patterns

Illustrative only — assume $75,000, a four-year horizon, a term loan at a fixed 11% nominal rate over 48 months, and a revolving line at 12% charged on the outstanding balance with a 0.25% unused-line fee. Chosen inputs, not market rates.

The rate difference of one point barely registered in any of the three. Days outstanding decided all of them.

What else differs

The question that decides it

Draw the next 24 months of the need. Not the amount — the shape.

If the picture is one continuous block, you want a term loan. The money is being used for something durable, the need does not go away, and paying interest on a balance that never falls is the most expensive way to hold long-term debt.

If the picture is a series of humps that return to zero, you want a line. You are financing timing, and you should pay for timing.

If the picture is a continuous block plus humps, you want both, and that is a normal structure: a term loan sized to the permanent need and a smaller line for the swings. Splitting it usually costs less than sizing one facility to cover everything.

The split, priced

Illustrative only — the same $75,000, except that $45,000 of it is a permanent need and $30,000 is a swing you draw three times a year for 60 days.

A single $75,000 term loan at 11% over 48 months costs $18,043.88 in interest.

Split it. A $45,000 term loan at 11% over 48 months costs $10,826.33. A $30,000 line at 12%, drawn three times a year for 60 days, costs $1,800 a year in interest plus $37.50 in unused-line fee on the average unused balance — $7,350 over four years. Total $18,176.33.

A difference of $132 across four years. Splitting saved nothing in interest, which is worth knowing before somebody sells it to you as a saving.

What it bought instead: a $30,000 facility that still exists in year five, a fixed monthly obligation of $1,163.05 rather than $1,938.41 when a month goes badly, and no interest paid on $30,000 during the eight months a year you do not need it. Those are the reasons to split a facility. Cheaper interest is not one of them, and a banker who pitches it that way has not run the numbers.

Two failure modes worth naming

Taking a term loan for a recurring gap leaves you paying for money after the gap has closed, and with no facility when it reopens. That is covered in the guide on matching the instrument to the gap.

Taking a line for a permanent need feels cheaper for the first year and then behaves like a balloon: interest-only, no amortisation, and a renewal date at which the whole balance is subject to a fresh credit decision. If your line has not been below half its limit in eighteen months, you have this problem now, and it is better addressed while the renewal is not imminent.

What underwriting generally looks at is whether the request fits the stated use. Asking for the structure that matches the need, and being able to explain why, is one of the few parts of an application entirely within your control.