Today, lending institutions are dominating the financial market arena because of the financial difficulties that most people are experiencing. Many apply for loans in order to meet their daily and urgent needs. Installment loans and lines of credit are two of these popular loans. They may seem similar in nature because both are repaid in monthly payments, but they have distinct differences.
Generally, an installment loan is a personal loan in which the principal amount and the interest are paid off through equal monthly payments. The borrower is given a fixed monthly payment over a predetermined repayment period. Most installment loans are offered by lenders when a borrower is not able to repay his regular short term loan. Generally, this is an unsecured type of loan and does not need any collateral
On the other hand, a line of credit is an arrangement extended by financial institutions (usually banks) and other licensed consumer lenders to creditworthy borrowers. A borrower is given a loan wherein he can withdraw any amount as long as he does not exceed the maximum amount indicated in the agreement. The interest is based on the amount of money actually withdrawn. The borrower may be required to pay an unused line of credit fee or an annual fee for the money not withdrawn. Take note however that lines of credit usually require collateral.
Although both are repaid through monthly payments, they have differences that borrowers can take advantage of. Knowing the difference between the two is important to choose the best type of loan option that is suitable to your needs.
Typically, a line of credit is said to be more flexible compared to an installment loan. With a line of credit, you only take out the amount you need, unlike installment loans where you take out your loan in one lump sum. Also, once you are approved for a line of credit, you need not apply again unless the total amount of the loan balance is withdrawn. But with installment loans, once you have fully repaid your loan, you need to undergo the loan application process again.
Also, with a line of credit, your monthly payment will depend only on the amount that you have withdrawn. So, the more you withdraw, the higher your monthly payment. Lines of credit can also be used as revolving credit. When you withdraw a certain amount from the total balance and repay that amount back, the total loan balance goes back to where it started. However, with installment loans, your monthly payment is the same throughout the entire loan term.
The good thing about installment loans is that they are unsecured. With lines of credit, once you fail to repay or to keep the terms of the loan, any property you used as collateral can be seized by the lender. You avoid the risk of losing something with installment loans; however, your credit score will be damaged in case of defaults. Also, installment loans are easier to apply for than lines of credit. Even with bad credit, you can still qualify for installment loans.
Which among the two loans is better? The answer depends on how you will use the loan. If you want a loan to make small and frequent purchases, getting a line of credit will be the most affordable way. If you need to borrow a large amount, an installment loan is a good choice.