Home » Line of Credit vs. Installment Loans: How Do They Compare?

Line of Credit vs. Installment Loans: How Do They Compare?

Consumers take out short- or long-term loans to manage their financial needs. Personal loans offer funds to cover a multitude of requirements, including sudden medical expenses, home repairs, or buying an automobile. The loans are available according to the consumers according to their current credit scores and income.

Traditional lenders evaluate creditworthiness and define how much the borrower can afford before providing a loan. Non-traditional lenders cater to consumers with poor credit who need assistance without significant delays. Reviewing the difference between a line of credit and installment loans shows the borrower how each of these options can help them.

What is an Installment Loan?

Installment loans provide consumers with a predetermined cash amount, and the consumer agrees to repay the loan in installments. Lenders provide several options for repaying the loan to keep the payments more affordable for the consumer. The payment amount reflects both principal and interest. It is a beneficial way to pay off debts and for consumers to get money when they need it quickly. Access to an installment loan could help the consumer pay unexpected costs and avoid unwanted circumstances. Consumers who need an installment loan can complete an application for a personal loan now.

How Are Installment Loans Repaid?

Installment loans are repaid over a predetermined amount of time. The lender provides a structured repayment plan for the borrower. The borrower must submit monthly payments according to the plan, or they incur late charges and penalties. Consumers can pay off the loan at any time without additional penalties or fees.

What is a Line of Credit?

A line of credit provides the consumer with a predetermined amount of money. The consumer doesn’t have to use the entire credit line, but they can access it at any time. The account holder pays for only the amount of the credit limit they use. Interest is applied to the balance each month after the account holder starts using the funds. If they don’t use any of the funds, interest won’t be applied, and the consumer doesn’t owe anything. The interest rate appears on the documentation for the account.

How Does a Line of Credit Work?

The credit line is like a credit card, and the borrower uses it whenever they choose. They aren’t required to use any of the funds within a specific time frame. The consumer has access to the funds when they need the money, and the consumer can use the money for anything they choose. The credit line and interest rate are based on the borrower’s credit scores and history. If a borrower has excellent credit, the creditor provides a larger credit limit and a lower interest rate. If the consumer has poor credit, the credit limit is the bare minimum with a higher interest rate. If the consumer uses the funds and pays them back in a timely manner, the creditor will increase the borrower’s credit limit. 

How Does the Lender Calculate Interest?

For the installment loan, the interest rate is based on the total amount borrowed and for how long. If the duration of the loan is longer, the interest the borrower pays is greater. A short-term loan incurs a lower amount of interest. If the borrower must provide a down payment for their loan, the down payment is deducted from the total loan amount, and the interest rate is multiplied by the remaining balance. The interest rate is based on the total number of payments and how long the loan is financed. 

How Do Traditional Lenders Provide Installment Loans?

A traditional lender must define the consumer’s creditworthiness before extending a loan to the consumer. They review the consumer’s credit scores and verify their income. Personal loans require a minimum credit score of at least 580. The income to debt ratio defines if the consumer can afford the loan or not. If it is higher than 43%, the lender is less likely to provide a personal loan for the consumer. Consumers with excellent credit and higher than average income get larger personal loans with a lower interest rate. They have access to short or long-term loans, and traditional lenders are more likely to provide a loan. The installment loan options show the borrower how much they pay each month according to the plan they select. 

What Do Non-Traditional Lenders Look for in a Borrower?

Non-traditional lenders don’t perform a credit check since they know the consumer has poor credit. They verify the borrower’s employment and income to ensure that the borrower can repay the loan. Non-traditional lenders present personal loans for a variety of reasons. Most borrowers get the same interest rate based on how much they borrow. The process is simpler than getting a loan from a traditional lender since the lender doesn’t review the credit scores. However, if the consumer has great credit scores, they have access to low-interest personal loans. 

What Happens if the Borrower Cannot Repay Their Loan on Time?

Borrowers facing sudden financial hardships and might experience difficulty repaying a loan. All they have to do is contact their lender and explain the situation. Some lenders offer forbearance for a limited time if the account is in good standing. It allows the borrower to stop payments for a limited amount of time without penalties, but the lender continues to apply interest to the account. With a non-traditional loan, the borrower can pay the interest or renew the loan to avoid more penalties. The lenders explain all options available to the borrower. Consumers take out personal loans for a variety of reasons, such as covering medical costs, unexpected bills, and home repairs. The loans provide them an adequate amount to cover these expenses. Consumers can acquire loans from traditional or non-traditional lenders.

Consumers with great credit can get traditional personal loans with lower than average interest rates. If they have poor credit, the consumers could turn to non-traditional lenders and get a personal loan with higher interest. Reviewing different personal loans shows consumers what options are available to them and what benefits the loans offer.