A Lender Offered Me A Line of Credit. How Is This Different Than A Direct Installment Loan?
When you take a payday loan, installment loan, or direct loan of any kind, it means a few very specific things. When you accept a personal line of credit, however, it is a different animal altogether. Which is best? Let’s take a bit of time to compare a personal loan against a line of credit. Then we can start to identify which is best for any specific needs.Financial experts agree there are differences and similarities between lines of credit, and personal loans. The similarities include:
- Both provide a consumer with cash they can use for any purpose
- Both require repayment in a certain amount of time
- Both come with interest that must be paid on the sums borrowed
- Both may have other fees associated with them (these can include anything from origination fees and service fees, and so on)
- Both have repercussions if left unpaid, such as penalties and more serious legal repercussions
- Both have limits based on your ability to repay them
Whether they differ the most is in how you receive the money borrowed and how they are repaid. A direct installment loan works within a fixed window of time. You get the funds in one lump sum and then you have a specific number of months or years to repay it. The repayment will include any interest or fees that are due to the direct lender.
An online cash advance is similar to most installment loans. You get X number of dollars and must repay that amount, plus interest, in X number of days, weeks or months. An online line of credit, is very open-ended and gives you a fixed amount of money (similar to a direct lender installment loan for $10,000) that you can repeatedly draw upon and repay. You will pay interest to a direct lender on the amount you are using, and can maintain “available funds,” for an indefinite period. Thus, it is a good call to investigate options for the line of credit if you are unsure of precisely how much you need, but know you do need the funding.
Which is the best direct lending option if you need cash?
The best way to determine which option is best for you is to ask yourself several key questions. What am I using this direct installment loan for? What is the rate of interest on either option? Also consider if you can repay back the full amount borrowed according to the terms offered. Remember, most direct installment loans will let you borrow a large amount of money upfront, but you need to pay interest on the full amount borrowed. With a cash advance or line of credit you can draw down cash as it’s needed over time.
As an example, you are going to pay for your child’s education and know exactly what college will cost each year. You can look for direct online loans (such as a mortgage) that will supply the large sum and allow you to budget the payment and repayment process. On the other hand, let’s say you own a condominium and you want to do some interior updates. You are unsure of precisely how much you can or will do, and you are not clear of how much it will cost. The line of credit may be better for your needs than what you can expect from direct lenders for installment loans.
Why would an online lender provide you an offer for a line of credit opposed to an installment loan? Typically, such an offer is derived from their evaluation of your needs, your capabilities, and your intended use of the funds. If you are comfortable with an open-ended loan and find yourself living with “ongoing, small or unanticipated expenses” or the need to “even out income and cash flow,” that line of credit is a better fit than a lump sum to be paid fast, and sometimes with a higher rate of interest. Additionally, your direct installment lender may have seen that a minimum monthly payment instead of a higher fixed payment might also be a better fit for your needs.
Make a decision that best fits your budget and long term financial goals
So, let’s get back to the original question posted above. An online installment loan company offered you a line of credit rather than an installment loan, and you’re wondering why – it is a bit clearer to understand. The online installment can be short term in nature. It’s a personal loan that can help with immediate needs, until the next paycheck. It is similar to most personal loans with the exception that it is a smaller dollar and higher cost loan, and lasts only a very short period of time before repayment is due.
From this perspective, we should take a moment to compare a payday loan to a personal loan rather than a typical line of credit. After all, the payday loan operates a bit differently and is a costlier way to borrow than the longer-term direct loan. The reason some may look to them is that they have poor credit or limited income, and a traditional direct personal loan is not within reach. However, many are unaware of the benefits of a line of credit, and its appeal to someone who might otherwise lean into the direct payday loan scenario. Are you suited to a line of credit? If your direct lender has made that offer, it might be a good idea to consider whether or not it is the best fit for your budget.