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Installment Loan Versus Line Of Credit

Feb 5, 2008
There are times when consumers simply need to borrow money. As most people know, there are many different ways to borrow money. Two of the most common ways are through either an installment loan or through a line of credit.

Knowing the difference between the two can be important. One of the best ways to make your choice is to know which type of loan will best suit your needs.

A line of credit offers most consumers a more flexibility type of loan than a installment loan. With a line of credit the borrower can take out funds whenever they are needed. There is no need to take the funds out in one lump sum, which is what happens with an installment loan. A line of credit, once it is approved, does not require the borrower to apply over and over again, unless the total loan amount is withdrawn.

Another important difference between the two types of loans is that with an installment loan your payments will be set and they will not vary as the loan term moves through time. With a line of credit, the monthly payment will depend on the amount of the total that has been withdrawn. In other words, the more you take out, the more you pay each month.

A very unique benefit to a line of credit is that it can also be revolving credit. What that means is that when you take a certain amount from the total and then pay that amount back, the total goes back up to where it was. For some consumers, this can be a more affordable way to make purchases than using installment loans.

A line of credit is usually reserved for those who have some high-dollar asset that can be borrowed against. For the most part, this is a home. Consumers should understand that any property that they put up for collateral can be seized by the lender if the terms of the loan are kept.

For a one-time borrowing need, with uncomplicated repayment options, an installment loan is probably the better choice. With an installment loan, you get a lump sum check and the payments are worked out in advance so that you know exactly what you owe each month.

Generally speaking, installment loans are easier to get than line of credit loans. With an installment loan, you may or may not be asked to put collateral. When collateral is used for an installment loan, the same conditions apply, in that if the loan terms are not honored, the collateral can be seized by the lender.

As mentioned above, with an installment loan you receive a lump sum. With the line of credit loan you will normally receive a check book that you can use to withdraw funds. This can be especially helpful for things like home improvement projects where you may have to pay several different people and several different times. It also allows you to keep your loan funds separate from your personal funds if you wish to do so. This makes bookkeeping much easier.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Loans and Mortgages Visit Britain's Debt Rises Faster Than Ever
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