What is the Difference Between an Installment Loan & a Line of Credit?

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Installment loans and lines of credit are two ways that you can borrow money. The best loan for you will depend on when you need the money.

Types

Installment loans include mortgages, car loans and student loans. Examples of lines of credit include credit cards and home equity lines of credit.

Getting the Money

A line of credit allows you to withdraw money as you need it. An installment loan gives you all of the money up front.

Paying Interest

Interest is charged on your outstanding balance on an installment loan. On a line of credit, interest is charged on the amount of the line of credit you have accessed.

Collateral

According to Business Dictionary, installment loans are usually backed by personal property, such as a home or car. Some lines of credit, such as home equity lines of credit, require collateral, but credit cards do not.

Considerations

If you need all of the money upfront, an installment loan can offer a fixed rate for a fixed period of time. However, if you only need a portion of the money, a line of credit may be better because interest will only be charged on the part you are using.

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