What’s the Difference Between a Line of Credit and Installment Loan?

Are you using the best personal credit tool for your needs? While you might feel a little overwhelmed when it comes to borrowing money, some methods may be a better fit for your unique financial situation than other credit forms.

Navigating these tricky financial decisions isn’t always easy, but we’re here to help. We’ll look at two common kinds of personal credit, a line of credit and installment loan, and the key differences to help you decide what’s right for you.

 

What Is a Line of Credit?

A line of credit is a type of flexible, revolving account that allows the borrower to access up to the account’s credit limit. The borrower can continue to use up to the credit limit as the balance is repaid on the account. Generally, interest/fees are applied when money is borrowed, as opposed to other types of loans that pay out in lump payments and have fixed repayment schedules.

 

What Is a Personal Line of Credit Example?

While creditors will vary widely in fees, interest and availability, here’s a sample personal line of credit account for illustrative purposes:

Sarah has a line of credit with a $3,000 credit limit and $775 balance. Currently, that account has $2,225 in available credit. When she wants to draw money, she pays a cash advance fee and/or interest rate set by her creditor. Her minimum monthly payment is also set by her creditor, which is typically based on the account’s outstanding balance.

 

What Are Some Uses for a Line of Credit?

One of the main features of a line of credit is its flexibility. A line of credit may be useful to have for emergency cash shortages, to supplement an irregular or seasonal income or even to provide peace of mind with easy access to cash, when necessary.

 

What Is an Installment Loan?

An installment loan is a different type of personal loan that provides a lump sum to borrowers upon loan approval, and is paid off in set amounts, or installments, over a period of time. An installment loan generally has a set repayment schedule and fixed interest rate. However, some lenders may offer more flexible terms, such as fee-free early repayment and/or customizable term options.

 

What Is an Installment Loan Example?

Installment loan agreements will vary from lender to lender, but the following example can shed light on this form of credit:

David took out a $4,000 installment loan with a 2-year term and fixed APR. His monthly payments are a predictable, fixed amount for the loan’s repayment period, or term. David’s monthly payments will also include the interest and any fees, based on the loan agreement.

 

What Are Some Uses for an Installment Loan?

Installment loans are generally issued for larger principal amounts and have longer repayment periods than other types of loans, like payday loans or lines of credit. Because of the higher amounts, installment loans may be better suited for financing larger up-front purchases, consolidating debt, home and auto maintenance or moving costs.

 

What’s the Difference Between a Line of Credit and Installment Loan?

Personal lines of credit and installment loans have a couple main differences, including the loan principal payout and repayment schedules. Lines of credit are not paid out in a lump sum, whereas installment loan proceeds are generally issued in one payment up front. Since a line of credit is a revolving account, credit becomes available as the balance is repaid. On the other hand, once an installment loan is repaid in full, the account generally closes.

 

 

The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.

Bonnie P

About 

Bonnie is a Chicago transplant who's committed to seeing the world on a dime. As an avid news junkie with an affinity for finance, she loves to help others do more with less.

Most Popular

5 Reasons Why You Need A Checking Account

5 Reasons Why You Need A Checking Account

Hard Vs. Soft Credit Inquiries: What You Need to Know

Hard Vs. Soft Credit Inquiries: What You Need to Know

What is Debt Consolidation and How Can it Help My Finances?

What is Debt Consolidation and How Can it Help My Finances?

The Best Tools and Tips to Consolidate Debt

The Best Tools and Tips to Consolidate Debt

What Does My Credit Score Mean?

What Does My Credit Score Mean?

Back to Top