Personal loans are available on a variety of products. Installment loans and lines of credit are two feasible options for borrowing money. However, there are significant differences between the two types. With this breakdown, you can determine which solution is the best fit for you.
What is an Installment Loan?
An installment loan is the most common type among personal loans. It is a one-time, lump sum of money that you can borrow from your bank or another lender. You are required to pay it back over a set period of time. The standard repayment schedule is comprised of a series of monthly payments. They are accompanied by a fixed annual percentage rate (APR).
Benefits and Features
Because of the pre-determined provisions outlined, you will know exactly how much to pay your lender each month. It eliminates surprises and simple miscalculations. The fixed terms allow you to plan better and be in control of your finances. This personal loan is ideal for college tuition, home improvements, and refinancing. It is also an optimal finance option for purchasing big-ticket items such as a house, car, boat, or RV.
What is a Line of Credit?
A line of credit provides money, as you need it. A lender determines an approved amount for a line of credit. You can then withdraw from that amount as the need arises. Your payments and APR will vary. They are based on the outstanding balance owed, your payment history, and other aspects of your lender’s criteria. Be sure to read the fine print, so you will have full disclosure.
Benefits and Features
This form of flexible borrowing is also known as revolving credit. As you pay down the outstanding balance, your available amount to borrow revolves back to the original amount. You are able to borrow again and again. It is very similar to having a physical credit card. The interest rate that you owe only applies to the amount that you withdraw. The minimum payments due are low.
What to Consider
Should you choose a longer-term, higher-value borrowing option or a shorter-term one? Both personal loans are subject to approval based on your annual income, credit score, and debt-to-income ratio. A history of several installment loans can prevent you from receiving future ones. Make a list of the pros and cons. Determine how and if you can promptly repay each based on their respective requirements. Typically, there are no penalties for early repayments of these personal loans. If you need further assistance, your bank or lender can assist you in making a final decision.