The need for getting credit is popular today because of the appealing ads posted by lending and credit institutions. As more people are experiencing financial difficulties, many are tempted to apply for loans in order to meet their daily and urgent needs. They say, “It is easier to find credit than cash.”
Installment loans and lines of credit are two of the most popular loans that offer credit to cash-strapped people. They may seem similar in nature because both are repaid in monthly payments, but they have distinct differences.
A typical installment loan is a type of a personal loan in which the principal amount and the interest are paid off through equal monthly payments. The borrower is given a monthly payment with a fixed and specified amount over a predetermined repayment period. Installment loans are offered by lenders if a borrower is not able to pay his regular short term loans. Generally, this is an unsecured type of loan and does not need any collateral
A line of credit, on the other hand, is an arrangement extended by financial institutions (usually banks) and other licensed consumer lenders to creditworthy borrowers. A borrower is given a certain amount of money wherein he can withdraw it any time, for as long as he does not exceed the maximum amount indicated in the agreement. The interest is based on the amount of money actually withdrawn. The borrower may be required to pay an unused line-of-credit fee or an annual fee for the money not withdrawn. Lines of credit usually require collateral.
Both of these loans are repaid through a monthly payment but they differ on ways borrowers can take advantage of the loan. It is helpful to know the difference between the two in order to have options in times of cash needs and to be able to choose the best type of loan suitable for your needs.
Basically, a line of credit is more flexible compared to an installment loan. With a line of credit, you only take out the amount you need, unlike installment loans where you take out your loan in one lump sum. Also, once you are approved for a line of credit, you need not apply again and again unless the total amount of the loan is withdrawn. With installment loans, once you have fully paid your loan, you will need to undergo the loan application process once again.
Furthermore, with a line of credit, your monthly payment will depend only on the amount you have withdrawn. So, the more you withdraw, the more your monthly payment will increase. Lines of credit can also be used as revolving credit. When you withdraw a certain amount from the total balance and repay that amount back, the total loan balance goes back to where it was. However, with installment loans, your monthly payment is the same all throughout your entire loan term.
One great benefit of getting installment loans is that you are not required to present collateral. Unlike lines of credit, once you fail to repay or to keep the terms of the loan, any property you used as collateral can be seized by your lender. Also, installment loans are easier to apply for, unlike lines of credit. Even with bad credit, you can qualify for installment loans, unlike applying for lines of credit.
Which of the two loans is a better option? The answer will depend on what you use the money for and how much you can afford to repay.