Installment Loan vs Line of Credit
An installment loan is a completely different animal than a line of credit. For the purposes of this comparison we are only considering a secured line of credit.
In this post we will include:
- introduction (you’re reading it)
- basic descriptions in brief
- 5 Points: 5 point descriptions
- Pros & Cons: pros and cons (alphabetically)
- W H W: where & how & why
- Experts: expert tips to consider
An installment loan is a form of credit approved by a lender to be paid back within an agreed term length. The borrower will sign an agreement with a licensed lender to make set payments (monthly or biweekly installments). This loan product can be secured or unsecured, and the interest rate is usually fixed.
A line of credit is a financial product secured by a tangible asset. The asset is usually property or a vehicle of some kind. Forms of asset can vary from lender to lender and borrower to borrower, and the interest rate is variable (with some exceptions).
For clarification: A fixed rate is an interest rate that doesn’t change during the entire term.
The nomenclature “installment loan” was traditionally used to describe any loan a consumer paid back with set periodic payment schedule. Still, today, if you’re approved by a bank or credit union for a vehicle or home loan it’s an installment loan by nature.
However, the same term is now used by cash advance stores and payday loan companies. These products carry with them extremely high fees and APR. For the purposes of our comparison we are using the traditional definition of an “installment loan”.
5 Point Descriptions
1) secured or unsecured
2) usually fixed payments
3) usually personal loans
4) small to medium amounts
5) not a home loan (mortgage)
Line of Credit
1) secured with asset (usually home equity)
2) wide ranging in amount of credit
3) usually with a variable rate (some exceptions)
4) revolving in nature to be paid back randomly
5) open credit line to be used at will
Pros & Cons
a) An installment loan doesn’t have to be secured with a form of asset such as home equity
b) Your total fees and interest can be settled in the initial loan agreement so you know exactly what your costs will be from the beginning to the end of the agreed upon term.
c) Installment loans can often be smaller in nature and take less time to get approved than if you were to start a revolving line of credit from scratch. With a line of credit you may have to jump through several hoops; such as getting real estate or other asset form appraised.
d) No chance of increasing your liability instantly (like with an LOC) because you would have to make another appointment with loan officer at your bank or credit union.
a) Depending on your credit score, installment loans can sometimes carry extremely high interest rate(s)
b) Installment loans can be applied for online and approved quickly so impulse borrowing can be factor – such as emotional spending without much consideration for your future financial fitness
c) Some high risk lenders offer smaller installments loan (usually for 3-6 month terms) a punishing APR. Late payment fees can also be really expensive depending in what State you live in and what the usury laws are your area.
d) Some predatory lenders call their loan products “installment loans” when in reality they’re nothing more than a glorified cash advance stretched over 3-6 months
Line of Credit
a) A line of credit usually has a much lower rate depending on your credit score and the type of asset used for security.
b) A line of credit can be paid back in many different ways. You can pay it back with a lump sum payment made at any time (in full or partial), or you can choose to make monthly or biweekly payments. You can even decide to not pay back anything for years as long as you are paying the monthly interest on the amount of cash you’ve withdrawn or transferred.
c) A line of credit can remain open as a revolving line of credit; which is ideal for small business owners. You can pay it back in full and leave it open so you can dip back into it again at a later date. You don’t have to make an appointment with a lender and sign more documents every time you need credit again in the future
a) You CAN’T get a line of credit unless you have some form of security the lender (bank or credit union for the most common examples) will accept.
b) The asset used for security is always on the line. Meaning the borrower’s home or asset(s) can be at risk if not managed and maintained responsibly. Since credit is instantly accessible, the borrower may be more susceptible to impulse spending.
c) A line of credit is usually a variable rate so your costs can change without notice at any time depending of federal rate fluctuations, and/or the economic climate.
Where, How and Why
You can get installment loans with:
1) online lenders
2) local credit unions
3) local banks
4) peer peer lending platforms
5) local cash lenders
How to apply for an installment loan:
1) apply with your main branch
2) phone local credit union for appointment
3) phone a local bank to make an appointment
4) join (become a member) of peer to peer platform
5) use search engine to research lenders and apply online
Since installment loans are often approved for small amounts they can be used for almost anything and everything. Here are some frequent requests we see on our site.
1) for emergencies
3) pay off other debts
4) repair a vehicle
5) take a vacation
6) education loans
7) purchase a vehicle
8) avoid eviction
Line of Credit
You can get a line of credit with:
1) your main branch
2) local credit unions
3) other local banks
How to get a secured line of credit:
1) secure with a vehicle
2) secure with primary home equity
3) secure with business assets
4) secure with rental property equity
Consumers use their line of credit accounts for many different reasons, but here is a list of the most common purposes:
1) property renovation projects
2) launch a small business
3) consolidate multiple higher rate credit accounts
4) consolidate multiple credit cards
5) purchase of a new car or truck in one lump sum
6) cover unexpected medical expenses
7) down payment on a vacation property
8) down payment on a vehicle
Before you decide to take out a line of credit, compare the costs to other types of credit that may be available to you. Look at the annual percentage rate (APR)
From the article: Is a personal line of credit right for you? – read full article here
Karen Haywood Queen
Karen has written for various online publications in the fields of technology and personal finance and has been featured on Bankrate.com.
Searching for “installment loan” online will return mostly short-term, low-dollar lenders who pitch installment loans as the safer, more responsible cousin of payday loans.
From the article: Best Installment Loans – read full article here
Saundra is a contributor for The Simple Dollar known for simplifying personal finance information for consumers in the United States
Two major differences between these two borrowing methods involve the “when” and the “what for.”
From the article: What is the difference between a loan and a line of credit? – read full article here
Troy Segal is an editor and writer based in New York City with over twenty years writing about personal finance, wealth management, and business.
Because installment loans don’t always require an asset for security with your bank or credit union, more consumers have access to this form of credit.
A secured line of credit may not be possible for a lot of consumers, but it’s the preferred credit type in the above comparison; due to a much lower interest rate and extremely flexible pay back options – basically unlimited.
As my own bank branch at Bank of America once said to me regarding our joint home equity line of credit (HELOC):
It’s your money. You can use as much of it as you want, whenever you want…
As great as that sounds, that’s not a good message for consumer(s) who are prone to impulse buying. Never forget that with a secured line of credit, your asset is on the line (usually a home).
By wife and I currently have a $220,000 line of credit using our home in Rancho Mirage as security, but we rarely use it. It’s a had a zero balance for over 5 years now. We can access it any time if we want (in case of an emergency or if we decide to purchase something); but there is very little chance that will be happening any time soon.
About the Author
Lance Somerset holds a degree from the University of Illinois. His expertise is in the field of personal finance, and is a fact checker for various online outlets in the United States. He was raised in Chicago, and now resides in Rancho Mirage, CA.
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