Line of Credit vs Installment Loan
December 14, 2016 by MoneyKey
We could all use some extra cash to help us out – whether it’s for an emergency repair, a surprise medical bill, or any other unexpected emergency expense. The important thing for anyone considering an Online Line of Credit or Installment Loan is to know the differences between them. Knowing how these products work will help inform your decision of which product is right for you.
What is an Online Line of Credit?
A line of credit is an ongoing, open-ended extension of credit. If you’re approved for a line of credit, you’ll be assigned a credit limit, which is the maximum amount of money that you’ll be able to borrow under that product. You can use this money when an unexpected emergency expense hits you from out of the blue. This means that upon opening your account, you can withdraw $0, the full amount of your credit limit, or any dollar amount in between. The amount of your required minimum payments will normally depend on the amount that you have withdrawn at that time. A line of credit would be a reasonable choice for someone who plans to borrow funds more than once or may have a re-occurring need for funds over a period of time.
Benefits of Online Line of Credit Loans
So, how can an online line of credit help you? Some of the general benefits are:
- Flexibility. This is one of the main reasons why a line of credit may be useful for someone who faces unexpected expenses or significant fluctuations in cash flow. You can request a certain amount of money against your credit limit, but you’re under no obligation to draw the entire amount. You can use the line of credit based on your particular needs, and the interest you pay will be on the amount you draw, not on your maximum available credit.
- Financial safety net. If you need to take your car in for an emergency repair, you have to handle an emergency medical expense, or you’re faced with any other sort of unexpected emergency expense that your savings won’t cover, having a line of credit to draw on may be a great way of handling this expense until your next paycheck.
- Flexible repayment. If you can keep hitting your minimum payments, you can adjust how much you repay based on your budget. For example, you can pay off your whole outstanding balance right away, or keep making the minimum payments until you can pay the rest off. Keep in mind that it’s generally a good move to pay off as much as you can as soon as possible to avoid accruing more interest.
- Line of credit for poor credit. When trying to get a credit card or other form of revolving credit from a bank, you may have a tough time if you have poor credit. However, you may be able to be approved for a line of credit with certain lenders, like MoneyKey, that weigh other factors more heavily when evaluating you as a borrower. This means you may be approved for an online line of credit even with a subprime credit score.
Revolving vs. Non-Revolving Lines of Credit
In many cases, a line of credit can be considered revolving credit, which is also called open-ended credit. What this means is that a borrower as the ability to spend money from this credit account, pay back the amount they’ve spent, and spend this money again in a revolving cycle. This revolving system we see with many lines of credit and credit cards is different than how installment loans like mortgages and car loans work.
In the case of an installment loan, also called closed-end loans, a borrower will receive a certain loan amount that they’ll have to pay back over the course of a certain number of months in equal installments. Once an installment loan is completely paid off, the borrower will have to apply for a new loan if they need more funds.
Not all lines of credit are the same though. There are also certain instances where a line of credit isn’t revolving credit, but still shares many of the same characteristics. With a non-revolving line of credit, a maximum credit limit will be set, you can draw funds from your line of credit, interest is charged is it normally would be, and the process of paying off your loan will be the same. The main difference is that once you make a payment, your available credit isn’t replenished. When the line of credit is completely paid off, your account will be closed and you won’t be able to continue to draw funds without applying for a new loan.
How do You Pay Off Your Online Line of Credit?
As we mentioned, a line of credit is generally open-ended, which typically means you won’t need to follow a specific timeframe when it comes to repaying your loan in full. You will, however, need to keep up with your minimum payments which will include any fees, interest and required principal paydown subject to the terms of the product you applied for. As you pay down the principal balance of your line of credit, or if you did not initially withdraw the entire amount available to you, you can access the remaining credit available up to your credit limit.
What is an Online Installment Loan?
There are many credit products that can be considered an installment loan. These loans can be used for both personal and professional purchases. Right now, we’re going to focus on personal installment loans — specifically those with short terms.
Like an online line of credit, small-dollar personal installment loans are also generally unsecured. What this means is that you won’t be required to put up any assets as collateral against your loan when you apply. Typically, your credit score will play a significant role when a lender evaluates you as a potential borrower, using it to gauge your creditworthiness.
How Do Installment Loans Affect Credit?
When you apply for a loan with MoneyKey, we only perform a soft inquiry into your credit. Otherwise known as a soft pull, this quick background check won’t appear on your credit history. Because of this, applying for a MoneyKey loan won’t have any effect on your credit score.
In fact, most of our lending process won’t impact your credit history. Typically, we won’t report your loan to a credit bureau as long as it’s in good standing and you’re paying on time. The only time when we do report to a credit bureau is when a customer defaults.
How Do Online Installment Loans Work?
As we mentioned, an installment loan differs from an online line of credit in that it isn’t revolving; it’s fixed.
For example, let’s say you’ve been approved for a $2,600 installment loan. This means that once you’re finished paying off your loan, you’ll need to apply for a new loan if you want access to more funds.
Once you’ve been approved for a loan, most lenders will transfer the approved amount to your checking account in as soon as one business day, giving you easy and quick access to the money you need. If you apply for online installment loans, much of the entire lending process can be done quickly online.
Benefits of Online Installment Loans
So, why would you apply for online installment loans? Let’s take a look at some of the potential benefits.
Manageable and Flexible Payments
When you need a quick influx of cash to handle an unexpected emergency expense, a lending option like a payday loan might put a little too much financial strain on you if you don’t think you’ll be able to pay off the loan in full on your next payday. An online installment loan might help you in this situation because of the smaller, more manageable payments. Instead of the total loan amount (plus fees and interest) being due on your next pay date, you’ll be able to pay back your online installment loans over time through smaller scheduled payments.
Paying off your loan in smaller increments may help you repay your loan and still be able to pay for your usual monthly expenses. Paying through installments, with the flexibility to repay early without penalties, may help you manage loan repayment and monthly bills in a way that suits your needs.
Higher Loan Amount
Because payments for online installment loans are spread out over a longer period of time, a benefit of these loans is that lenders can usually offer a higher loan amount. If you’re covering a costly unexpected emergency expense, this higher loan amounts might be enough to cover this emergency until your next payday. Larger loan amounts, coupled with manageable payments, may also reduce the need to take out multiple loans to acquire enough funds to cover an unforeseen expense.
Another helpful aspect of an online installment loan is speed. An online cash advance like an installment loan may be deposited into your bank account as soon as the next business day, if approved. This can be particularly helpful when you need money to cover an immediate, emergency expense that came up unexpectedly. You’ll then be able to repay the installment loan over time in smaller, more budget-friendly amounts.
Many direct lenders offer online installment loans so you can get the money you need quickly, when you need it. Before you start the application process for any online installment loans, make sure you do some research and keep an eye out for a state licensed lender like MoneyKey. It’s important that you the rates and terms of your loan product are clearly laid out and that you understand the product you’re applying for. To find out more about MoneyKey’s installment loan products, visit our Rates & Terms page.
How are Payments for Installment Loans Determined?
There are a number of different factors that go into determining when and how much you’ll need to pay for every installment of your loan depending on the lender, including:
- State lending laws
- Your income
- Loan principal
The cost of the loan, which often includes interest expressed as an APR, will help to determine the amount you’ll be paying for installment. Typically, a small-dollar installment loan will have a higher APR than a line of credit.
Now, one of the biggest questions is why someone would choose credit with a higher APR. In some cases, that’s one of the reasons why you might be looking for small-dollar online installment loans. While a line of credit may have a lower APR in some cases, you might also have a harder time getting approved for one if you have poor credit. However, some online lenders that offer Lines of Credit, like MoneyKey, look at factors other than your credit score when reviewing your loan application. Make sure you review the requisite qualifications of each specific lender before you apply for a loan.
Which Product is Right for You?