Loans can be very helpful in times of financial need. However, it can be difficult to decide on the best loan for your situation because of the numerous options available. This page looks at the differences between personal loans and installment loans to help you pick up the one that will work best for you.
What Is a Personal Loan?
A personal loan is an unsecured loan that lenders give qualified borrowers to cover different types of expenses like car repair, medical bills, debt consolidation, and more. Basically, this type of loan is quite flexible and you can spend it on a wide range of needs.
Personal loans are usually repaid with interest and the period of repayment is mostly 24 months. You can borrow this type of loan from banks, online lenders, and credit cards.
What Is an Installment Loan?
As the name may suggest, an installment loan is typically a lump sum of money that a lender gives to a borrower and is repaid over a period in regular installments. This type of loan is mostly used to make huge purchases like a car or house.
Generally, installment loans can be secured on unsecured. Personal loans fall under the umbrella of installment loans.
How Do They Differ?
Here are the common differences between personal loans and installment loans.
- Interest
Both loan types require paying interest for the amount borrowed. However, the monthly interest fee for personal loans is considerably higher than other types of installment loans. Nevertheless, the interest that you need to pay may vary from one lender to another.
- Flexibility
Unlike installment loans, which are used to fund a specific and predetermined need, personal loans can be used to finance virtually anything. Personal loans are more flexible and can finance unforeseen circumstances.
- Qualification
The requirements for acquiring a personal loan and an installment loan vary. Most personal loans do not require collateral or any security for you to secure them. On the other hand, installment loans have a rather complex process and require collateral or security.
- Credit Score
While both personal loans and installment loans are ideal for building your credit, the latter is better if you have a low credit score. This is probably because you can repay in installments, making it easy to clear the loan.
However, you may at times be required to have a high FICO score to secure this loan. On the other hand, personal loans work best when you need to consolidate your loan.
- Application Process
For obvious reasons like not requiring collateral, personal loans are quite easy to apply for. Depending on the lender, the money may be disbursed to your account within several days. As for installment loans, it can take a while to process your application.
Conclusion
The decision to choose between personal loans and installment loans will depend on your specific needs and requirements. Ultimately, personal loans work best when you need to finance emergencies or consolidate debt while installment loans do well to finance predetermined situations.