Personal loans are available in a variety of products. Installment loans and lines of credit are two viable options for borrowing money. However, there are significant differences between the two types. Using this breakdown, you can determine which solution is best for you.
What is an installment loan?
An installment loan is the most common type of personal loan. It is a one-time sum of money that you can borrow from your bank or another lender. You are required to return it within a certain period of time. The standard payment schedule is made up of a series of monthly payments. They are accompanied by a fixed annual percentage rate (APR).
Benefits and features
Because of the default provisions described, you’ll know exactly how much to pay your lender each month. Eliminate surprises and simple miscalculations. 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 financing option for the purchase of expensive items, such as a house, car, boat or recreational vehicle.
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 your outstanding balance due, your payment history, and other aspects of your lender’s criteria. Be sure to read the fine print, so you have full disclosure.
Benefits and features
This form of flexible loan is also known as revolving credit. As you pay off the outstanding balance, the amount available to borrow returns to the original amount. You can borrow over and over again. It is very similar to having a physical credit card. The interest rate you owe is only applied to the amount you withdraw. The minimum payments due are low.
What to consider
Should you choose a longer term or a shorter term higher value loan option? 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 may prevent you from receiving others in the future. Make a list of the pros and cons. Determine how and if you can pay each promptly based on their respective requirements. There are usually no prepayment penalties on these personal loans. If you need more help, your bank or lender can help you make a final decision.