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If you’re facing an unexpected emergency without any savings, should you take out a loan or put it on credit? This is an important question to ask, but how can you answer it if you don’t know the difference between them?
To help you decide which one is best for your emergency, keep scrolling. Here’s a quick guide comparing the three biggest differences between installment loans and lines of credit (LoC).
1. How Your Earn Interest
With an installment loan, lenders apply interest and other finance charges to the entire amount you borrow from the start. They bundle these fees into each installment of your repayment.
When you’re approved for an LoC, you’ll receive a credit limit. This represents the total amount you can borrow at one time. A financial institution like MoneyKey gives you the freedom to use all of this line of credit limit at once or in smaller amounts as you require funds, as long as you have available credit and your account is in good standing.
How much you end up using is critical because you only accrue interest and finance charges on what you withdraw against your limit — not the total available limit.
2. How You Repay What You Owe
Borrowing money has the same basic principle no matter what you use. Eventually, you have to pay your lender back.
When it comes to an LoC, you’ll receive a bill that includes a minimum payment. It’s a small portion of the overall balance covering finance charges, interest, and a payment toward your principal (the amount owed).
Making the minimum keeps your account in good standing, which means your lender won’t share delinquencies with a major credit reporting agency.
It also means you’ll carry over a balance into the next statement. Any leftover money you don’t pay will be subject to additional interest and finance charges on the next billing statement.
An installment loan has no such flexibility. If you don’t pay the full amount for each scheduled payment, you could rack up painful late fines and other costly consequences.
3. How You Access Your Funds
An installment loan is a one-time solution to a singular emergency, whereas you can use a line of credit more than once to help with future expenses.
Why? It has to do with their terms.
An installment loan has closed terms
An installment loan is a closed-ended product. This means you’ll receive a repayment schedule with a definite end date. Once you pay back everything you owe, your lender shuts down your account. If you need help down the line, you’ll have to reapply for a new installment loan.
A line of credit has open terms
In contrast, an LoC is an open-ended product. While you’ll have to pay off what you use by your lender’s schedule, the account remains open even after you bring your balance to zero.
In other words, you can borrow repeatedly as long as you keep your account in good standing. You can withdraw funds up to your limit any time it’s available without having to reapply.
What Should You Borrow?
To bring it all back to the question: which one should you use? Only you can answer that one. But now you know how each product works, you’re in a better position to solve your emergency responsibly.