You have an unexpected expense. Should you take out a line of credit or get a personal loan? It really depends on your personal situation. Let's take a look at whether installment loans or credit cards might be better.
The Difference Between Installment Loans and Credit Cards
The main difference between an installment loan and a credit card is that you'll pay back the loan in installments over time, whereas you'll pay all of your credit card bill at once.
Of course, there are many different types of installment loans and credit cards – some offer longer repayment periods or lower interest rates or higher limits than others. One type of loan may be better than another, depending on your specific needs.
What Factors Will Affect Your Choice?
What should you consider when thinking about installment loans and credit scores?
- Credit scores. If you have bad credit, it's usually easier to qualify for an installment loan than for a credit card. But this also depends on the amount that you want to borrow.
- Your current debts. If you've already got some credit card debt (or other types of debt), it's best to pay that off before taking out another loan. This is because having more credit available can make it easier to get into serious financial trouble... which lenders know. They usually want to see a good debt-to-income ratio.
- Your financial situation. Do you need money for a one-off payment or investment? Or do you need money over a longer period of time?
Really, installment loans and credit cards are used for different things. An installment loan is used for a one-off expense; credit cards are used for more persistent situations.
The Benefits of Installment Loans vs Credit Cards
An installment loan will usually have lower interest, such as 10% vs. a 20% credit card, although this may vary. Many people find it easier to pay back an installment loan because they have to; it's a set payment that is designed to pay off the loan over a certain amount of time. Installment loans can be much easier to get if they're secured with the value of property, such as a car or a home.
When Should You Use an Installment Loan?
Ultimately, an installment loan is often easier to pay off, lowers interest, and helps your credit more. But a credit card is going to be more flexible. if you're concerned, consider talking to a financial advisor.