Unexpected events happen in life and you may find yourself in need of some extra cash. Maybe your car broke down and you need to pay for the repairs, or you found a new place and need to cover moving expenses. When you need to borrow money, choosing the right type of credit can make a big difference.<\/p>\n
Two common options are a personal line of credit<\/a> and a personal installment loan<\/a>. Depending on your needs as a borrower, they work differently, and one may be better suited for the situation.<\/p>\n An installment loan provides a lump sum up front with scheduled payments, while a line of credit lets you borrow funds as needed up to a set credit limit. While both options allow borrowers to access funds, they differ in how they provide money, how repayment works, and how interest is charged.<\/p>\n An installment loan typically provides a lump sum of money up front. You then repay the loan through scheduled payments over a set period of time.<\/p>\n A personal line of credit gives you access to funds as needed rather than all at once. You can borrow up to your credit limit, and as you repay what you’ve borrowed, those funds may become available again.<\/p>\n When approved for a personal installment loan you receive a lump sum of money up front, meaning you borrow a fixed amount that is repaid through regular payments over a set period of time.<\/p>\n Unlike a line of credit, you receive all of the funds at once rather than borrowing as needed. Interest is generally charged according to the terms of the loan and may be based on the amount borrowed. The specific terms and conditions such as interest rate, repayment period and frequency, and fees will depend on the lender.<\/p>\n With a line of credit you receive a credit limit. You can borrow the funds you need, when you need them, up to your credit limit. As you repay your balance, you may be able to access those funds again.<\/p>\n A personal line of credit is a form of revolving credit<\/a> where you can withdraw the cash you need, when you need it. Instead of getting a lump sum payment, you\u2019ll receive a credit limit that you can borrow against. As you repay your balance, you may be able to access those funds again. You often only need to pay interest based on the amount you borrow, rather than on the full credit limit, though you may also be charged an account maintenance fee or draw fee. Different lenders will have different terms and conditions so be sure to do your research.<\/p>\n Examples of revolving credit include credit cards, personal lines of credit and business lines of credit. Home equity lines of credit (HELOCs) are another common type of revolving credit, though they are secured by your home.<\/p>\n Installment loans typically have fixed payments over a set repayment period. Because the payment amount is often consistent, some borrowers may find these loan payments easier to budget for.<\/p>\n A line of credit can offer more flexibility because you can borrow only what you need, when you need it. Your payment amount, including any minimum payments, may depend on how much you’ve borrowed, your interest charges, and your lender’s repayment requirements.<\/p>\n Interest is another important difference between these types of loans.<\/p>\n With an installment loan, interest is generally charged according to the loan agreement and based on the amount borrowed. Since you receive the full loan amount up front, interest calculations are tied to that balance.<\/p>\n With a line of credit, interest is typically charged on the amount you borrow rather than your full credit limit. This means that if you have a $5,000 credit limit but only borrow $1,000, you’ll generally only be charged interest on the $1,000 balance.<\/p>\n Interest rates vary by lender. Many installment loans offer fixed interest rates that remain the same throughout the loan term, while many lines of credit use variable interest rates that can change over time.<\/p>\n An installment loan<\/a> is a type of loan that provides borrowers with a lump sum of money up front. The borrower repays the loan through regular payments, or \u201cinstallments\u201d, over a predetermined period of time. The specific terms and conditions such as interest rate, repayment period and frequency, and fees will depend on the lender.<\/p>\n Personal loans can be useful when you know exactly how much money you need and for large, one-time expenses. This could include costs like debt consolidation, covering the cost of car repairs, buying new appliances for your home, or financing a home improvement project.<\/p>\n Predictable payments.<\/strong> Many installment loans have fixed payments, making it easier to build repayment into your budget.<\/p>\n Defined repayment timeline.<\/strong> You’ll typically know how long you’ll be making payments and when the loan is expected to be paid off.<\/p>\n Useful for one-time expenses.<\/strong> If you know the exact amount you need up front, an installment loan may be a practical solution.<\/p>\n May simplify debt consolidation.<\/strong> Some borrowers use installment loans to combine multiple debts into one monthly payment.<\/p>\n Less flexibility after funding.<\/strong> If you take out a loan and need additional funds later, you\u2019ll need to apply again for a new loan.<\/p>\n Interest applies to the amount borrowed.<\/strong> Because you receive the full loan amount up front, interest is generally tied to that balance according to your loan agreement.<\/p>\n Eligibility requirements apply.<\/strong> Lenders may review factors such as income, credit score, credit report, and overall creditworthiness during the approval process.<\/p>\n A line of credit<\/a> is a form of revolving credit that lets you borrow from available credit<\/a> when you need funds. Instead of receiving a lump sum payment, you’ll receive a credit limit that you can draw from as needed. As you repay what you’ve borrowed, those funds may become available again.<\/p>\n A line of credit has many benefits<\/a>. Because of its flexibility, a personal line of credit may be useful for ongoing expenses or situations where you aren’t sure exactly how much you’ll need to borrow. For example, it may help cover home renovations, unexpected repairs, or temporary cash flow gaps.<\/p>\n Ongoing access to funds.<\/strong> As long as your line of credit remains open and you haven\u2019t reached your borrowing limit, you\u2019ll have access to funds when you need them.<\/p>\n Borrow only what you need.<\/strong> Rather than taking a full loan amount up front, you can draw funds based on your needs.<\/p>\n Flexible for changing expenses.<\/strong> A line of credit can be useful when expenses occur over a period of time rather than all at once. Many borrowers choose this type of financing because of 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.<\/p>\n Interest is often based on what you borrow.<\/strong> With a personal line of credit, you\u2019ll usually only pay interest on the amount you’ve borrowed, not your full credit limit. Understanding how interest on a line of credit works<\/a> can help you better estimate borrowing costs and repayment obligations.<\/p>\n Payments may vary.<\/strong> The amount you pay probably won\u2019t be the exact same every month because it depends on how much you borrow. Many lines of credit come with variable interest rates, which can also make it difficult to predict the amount of your bill.<\/p>\n Potential to overspend.<\/strong> Having ongoing access to available credit requires careful budgeting and responsible borrowing habits. As long as you remember your goals and stick to your budget, you should be able to stay on track.<\/p>\n Can affect credit utilization.<\/strong> A line of credit is a revolving credit account. Carrying high balances may increase your credit utilization ratio, the percentage of available credit you’re using, which may affect your credit score.<\/p>\n Additional fees may apply.<\/strong> Depending on the lender, maintenance fees, draw fees, or other charges may apply. Even if you don\u2019t take a draw from your line of credit, your lender may still charge you maintenance fees to keep the account open.<\/p>\n A line of credit may be a better fit if you want ongoing access to funds, while an installment loan may make more sense if you know exactly how much money you need up front. When deciding between a personal line of credit or a personal installment loan, the right option depends on your situation, how much flexibility you want, and how you prefer to repay what you borrow.<\/p>\n A line of credit may be worth considering if:<\/p>\nLine of credit vs. installment loan: what’s the difference?<\/h2>\n
Funding structure: lump sum vs. revolving credit.<\/h3>\n
Repayment: fixed payments vs. flexible payments.<\/h3>\n
Interest: charged on the full amount vs. only what you use.<\/h3>\n
What is an installment loan?<\/h2>\n
Pros of an installment loan.<\/h3>\n
Cons of an installment loan.<\/h3>\n
What is a line of credit?<\/h2>\n
Pros of a line of credit.<\/h3>\n
Cons of a line of credit.<\/h3>\n
Which should you choose?<\/h2>\n
When a line of credit might be right.<\/h3>\n