Best Loan Rates vs. Lines of Credit (2025): Understanding the Cost Differences

If you need the full amount upfront and want fixed monthly payments, a term loan is usually cheaper and more predictable. If you’ll borrow intermittently and want on-demand flexibility, a line of credit (LOC) can cost less because you pay interest only on what you draw—but most LOC rates are variable and move with prime. Always compare APR (fees included), not just the headline rate. This will be a guide to everything you need to know about loan rates vs. lines of credit.

Rates checked: 2025.

Table of Contents

Current rate snapshot (what sets today’s floor/ceiling)

U.S. bank prime rate: 7.50%. Many lines of credit and HELOC APRs are prime plus a margin, so prime is the anchor.
Average 24-month personal loan APR (banks): ~11.57% (May 2025, Fed G.19/FRED). Good benchmark for unsecured term loans.
Home-equity rates (useful LOC proxy):
- HELOC average: ~8.13% (Aug 2025).
- Home-equity loan average: ~8.23% (Aug 13, 2025).
SBA 7(a) business loans (caps): Max APRs are base (prime) + 3.0% to 6.5%, depending on the amount—a helpful ceiling for small-business term loans.

Why this matters: If a lender quotes a business LOC at prime + 2.5%, today that’s roughly 10.0% APR (7.5 + 2.5). A consumer personal loan at banks currently centers around ~11–12% for 24-month terms; credit profile, lender type, and fees move you up/down from there.

Loan Rates vs. Lines of Credit Comparison

Term loans (fixed-sum, fixed timeline)

You receive a lump sum and repay it over a set term (e.g., 1–7 years) with fixed or variable rates. Most personal and many business term loans are fixed—great for budgeting.

Best for: One-time, large purchases (equipment, renovations, consolidation).
Cost clue: Banks’ 24-month personal loan APR averages around 11–12% today.

Lines of credit (revolving, draw as needed)

You’re approved for a limit and only pay interest on amounts you draw. Many LOCs are variable at prime + margin, so payments can rise/fall with rates.

Best for: Ongoing or unpredictable needs (working capital, seasonal gaps, emergency access).
Cost clue: HELOC/LOC benchmarks sit a bit above prime (today, often ~8–11%+, depending on margin and credit).

Loan Rates vs. Lines of Credit: side-by-side

Feature	Term Loan (Loan Rates)	Line of Credit (LOC Rates)
Interest style	Usually fixed; sometimes variable	Usually variable (prime + margin)
What you pay interest on	The entire principle from day one	Only the drawn amount
Payment predictability	High (fixed amortization)	Medium/Low (varies with rate & draws)
Flexibility	Low (one-time funding)	High (revolving access)
Typical use	One-time, planned expenses	Ongoing, uncertain expenses
Fee patterns	Origination (1–5%) is common	Maintenance/draw fees are more common
Business cap reference	N/A	SBA 7(a) caps = prime + margin ceilings

Cost comparisons (with transparent assumptions)

Method: Illustrative calculations use simple interest approximations or standard amortization where noted; your APR will vary with fees/credit profile. Always compare APR, not just nominal rates.

Scenario A— “I need all the money now.”

Need: $50,000 today for equipment.
Term loan: 5 years at 9% APR (fixed). Monthly ≈ $1,038; total interest ≈ $12,280 (standard amortization).
Business LOC: Draw the full $50,000 at prime + 2.5% ≈ 10.0% today. If repaid on a 5-year amortization, monthly ≈ $1,062; total interest ≈ $13,720 (approx.).
Verdict: With a full, immediate draw, a term loan often wins on cost because you can lock a lower fixed rate and avoid LOC fees/variability. (Use SBA’s caps as a sanity check for business loan offers.)

Scenario B—”I’ll draw in small bursts.”

Need: Up to $50,000 over the year, but only $10,000 is used for 6 months.
LOC: $10,000 at ~10% for 6 months → ~$500–$520 interest + any maintenance/draw fees.
Term loan: Full $50,000 at 9% for 60 months → you pay interest on all $50k, used or not.
Verdict: For intermittent, smaller needs, a line of credit is usually cheaper because you’re not paying for idle principal.

Scenario C—Emergency Backup

Goal: Access to funds, but you may not use them.
Term loan: You pay interest regardless.
LOC/HELOC: $0 cost until you draw, but note variable-rate risk and possible line freezes. HELOC averages ~8.1–8.3% currently.

How lenders set rates (so you can predict quotes)

Prime → margin (LOCs/HELOCs).
Most variable LOCs are priced at prime + X%. With prime = 7.50%, a +2.0% margin yields 9.50% today; your credit/collateral sets the margin.
Market benchmarks & underwriting (term loans).
Banks publish 24-mo personal loan averages (~11.57%), but your actual APR hinges on term length, credit, collateral, and fees.
Policy caps (SBA 7(a)).
For many small-business loans, prime + capped spreads (up to +6.5%) define the upper bound.

Choosing fast: a 4-step framework

Do you need the full amount upfront? Yes → Term loan. No → Line of credit.
Is payment stability critical? Yes → Fixed-rate loan.
Will you borrow sporadically? Yes → LOC (interest only on what you use).
Compare true cost: Check APR, fees (origination vs. maintenance/draw), and whether the rate is fixed or variable.

Pros & cons recap (at a glance)

Term loans (loan rates)
Pros: Predictable payments; potentially lower fixed APRs; good for large, one-time spends.
Cons: Less flexible; interest on the full amount from day one; origination fees are common.

Lines of credit (LOC rates)
Pros: Pay interest only on drawn amounts; revolving access; great for uneven cash flow.
Cons: Often variable (rises/falls with prime); maintenance/draw fees; possible line freezes/cuts.

What to watch this year (practical tips)

Always quote APR, not just “rate.” Fees swing the real cost.
Ask for the margin. For LOCs, “prime + ?” tells you the moving part.
Benchmark before negotiating. Use Fed G.19/FRED for personal loan averages and Bankrate for HELOC/home equity snapshots.
Business borrowers: sanity-check quotes against SBA 7(a) maximums.
Set a review reminder. Variable products move as conditions change; today’s averages reflect prime at 7.50%.

FAQs

Is a line of credit cheaper than a loan?
If you borrow occasionally or small amounts, often yes (interest only on draws). For big, immediate needs, a fixed-rate term loan can be cheaper overall.

Are loan rates fixed or variable?
Both exist. Personal loans are commonly fixed (predictable payments). Business loans can be fixed or variable.

What’s the relationship between LOC rates and prime?
Most LOCs are prime + margin. With a prime at 7.50%, your APR = 7.50% + margin.

How do HELOCs price vs. personal loans?
HELOCs (secured by home equity) often track prime and can price below many unsecured personal loans; current HELOC averages are ~8.1–8.3%.

What’s a fair small-business loan rate?
Depends on collateral and credit, but SBA 7(a) caps provide a prime-plus ceiling (up to +6.5% depending on loan size).

Methodology & sources

Benchmarks: Federal Reserve H.15 (prime), G.19 (personal-loan averages), FRED series for 24-month personal loans, Bankrate HELOC/home-equity surveys, and SBA for 7(a) caps.
Calculations: Standard amortization for term-loan examples; interest-only approximations for LOC examples; fees excluded unless noted.

About the author

By CASEY FROST—finance writer and lending analyst focused on small-business financing and consumer credit. CASEY translates complex bank pricing (prime, margins, and APRs) into clear, step-by-step guidance for real-world decisions.
Reviewed & updated: 2025.

Loan Rates vs. Lines of Credit (2025): Understanding the Cost Differences