When Should You Choose an Installment Loan vs. a Line of Credit?

You’ve finally decided to update your bathroom—nothing fancy, just a new sink, cupboard, shower, and toilet to make the space more modern and functional. Now comes the big question: how should you pay for it? If you’re thinking about borrowing, you’ve likely come across two common options—installment loans and lines of credit. While both can give you access to the funds you need, they work in very different ways. 

In this blog, we’ll discuss the key differences between the two, explore the pros and cons, and help you decide which option might be the better fit for your project.

What is an Installment Loan?

An installment loan is a fixed amount of money that you borrow and pay back over time in regular, scheduled payments. It’s often used for one-time expenses like emergency bills, home repairs, or consolidating debt. Common types include personal loans, auto loans, and student loans. 

What is a Line of Credit?

A line of credit lets you borrow from a fixed pool of funds as needed, similar to how a credit card works, but with more flexible terms. You don’t have to take the full amount all at once, and you only pay interest on what you actually use. 

Most lines of credit are revolving, which means once you pay back what you’ve borrowed, you can use it again. This flexibility makes it a popular choice for ongoing or unpredictable expenses, like covering small business costs or handling irregular bills over time. It’s a pay-as-you-go approach to borrowing.

Key Differences Between the Two

When comparing an installment loan vs. line of credit, the biggest difference lies in how you borrow and repay. An installment loan gives you a lump sum upfront with a fixed repayment schedule—great for one-time expenses like home repairs or big purchases. A line of credit, on the other hand, offers flexible access to funds over time and a variable repayment structure based on what you use. Interest rates and credit impact can also vary. With responsible use, both options can help build credit, but missed payments or high balances may affect your score differently depending on the type of loan.

When to Choose an Installment Loan

An installment loan is often the better choice when you’re facing a large, one-time expense and want the peace of mind that comes with fixed payments and a set payoff date. If you’re remodeling a bathroom, covering a medical bill, or consolidating credit card debt, an installment loan can help you stay organized with predictable monthly payments. One of the most common uses for personal loans is to combine high-interest debt into a single, manageable loan with a lower rate.

Because installment loans give you the full amount upfront, they work well when you know exactly how much you need. They also encourage long-term planning, which can help support your goal to secure financial health. If you value structure, consistency, and a clear timeline for repayment, an installment loan is likely your best fit. Just be sure to review the terms and compare rates before signing on the dotted line.

When to Choose a Line of Credit

A line of credit is a smart option when your expenses aren’t all happening at once. It’s especially useful for things like small business cash flow, ongoing home improvement projects, or covering irregular bills. Instead of borrowing a lump sum, you’ll have flexible access to funds and can draw only what you need, when you need it.

This setup works well if your borrowing needs change from month to month. You’ll only pay interest on what you use, and once you repay it, that money becomes available again. Just keep in mind that using a line of credit responsibly can help maintain or improve your credit score—but carrying a high balance or missing payments could hurt it. If you’re comfortable managing the revolving nature of this option, a line of credit offers flexibility and control without committing to a full loan upfront.

Things to Watch For With Either Option

Whether you're leaning toward an installment loan vs. line of credit, it’s important to understand the details before you borrow. While both can be useful, the fine print can make a big difference in the total cost and experience. Here are a few things to keep in mind:

• Be aware of interest rates, fees, and repayment terms—these can vary widely by lender.
• Watch for prepayment penalties with installment loans, and draw fees or annual fees with lines of credit.
• Understand how interest is calculated and when it begins accruing.
  
  
• Review credit score requirements, which may be stricter for certain lenders or loan types.

Doing your homework upfront can save you from surprises later and help you pick the option that truly fits your financial situation.

Choosing the Right Option For You

Both installment loans and lines of credit can be helpful—it all depends on your situation. If you need a lump sum and want steady payments, an installment loan may be the way to go. For flexible, ongoing expenses, a line of credit might suit you better. Think about your financial goals and how you prefer to repay.

Ready to begin? Get started with an installment loan with Credit Central today.