What’s the Difference Between an Installment Loan and a Line of Credit?
If you’re in need of fast and easy funding, it’s a good idea to make an informed choice about the type of loan you pursue. Some lenders, including Neighborhood Trust, offer different options that have distinct features. Read on to learn more about the differences between an installment loan and a line of credit — two of our most popular funding options.
What Is an Installment Loan?
An installment loan is a common type of personal loan that issues a one-time lump sum to approved applicants. Borrowers repay the debt in set increments, or installments, over a period of time. Installment loans generally have a predetermined repayment schedule and fixed interest rate. However, some lenders may offer more flexible repayment terms, such as fee-free early repayment.
Overall, the key features of an installment loan are:
- Lump-sum funding
- Fixed rate repayment
- Predetermined repayment schedule
What Are Some Uses for an Installment Loan?
An installment loan is generally issued for larger principal amounts and has longer repayment periods than revolving funding methods, like a credit card or line of credit. As a result, borrowers often use installment loans to finance large purchases, including car repairs, moving or home expenses, and debt consolidation.
What Is a Line of Credit?
A line of credit is a type of revolving credit that is similar to a credit card. Borrowers with a line of credit have access to funds up to the credit limit. As funds are repaid, that amount is available again to reuse. In general, interest and fees are only applied to the amount borrowed, as opposed to other types of loans that issue funds in a lump sum.
Overall, the key features of a line of credit are:
- Ongoing access to funds up to credit limit
- Only pay interest and fees on the amount borrowed
What Are Some Uses for a Line of Credit?
One of the best features of a line of credit is its flexibility since it provides ongoing access to capital. It can be useful for those looking to cover the occasional cash shortage or to supplement an irregular income when funds are low.
A line of credit may be useful to have for emergency cash shortages, to supplement an irregular income or even to provide peace of mind with easy access to funds, when necessary.
What’s the Difference Between an Installment Loan and a Line of Credit?
An installment loan and a line of credit have a few main differences, including the loan principal payout, repayment schedules, and fees and interest. Installment loan funds are issued in one lump sum up front, while a line of credit provides access to funds up to the credit limit. Once an installment loan is repaid in full, the account typically closes. On the other hand, a line of credit is a revolving account, so funds become available again as the balance is repaid. Additionally, since installment loans are issued in one payment, interest and fees are applied to the full loan amount. For a line of credit, you typically only pay interest and fees for the amount that you borrow.
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