Personal Installment Loans vs. Personal Line of Credit: How Do You Choose?
In Singapore, there are 4 main types of personal loans: personal installment loans, personal line of credit, balance transfers, and debt consolidation plans. Of these, personal installment loans and personal lines of credit work quite similarly: they can both be used for almost any purpose, while the other two can only be used to pay off existing debt. However, personal installment loans and personal lines of credit have important distinctions that make them useful for different types of people and uses. Read our guide to the most appropriate use of an installment loan or line of credit so you can use them correctly.
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How Personal Installment Loans and Personal Lines of Credit Work
A personal installment loan is a lump sum that you can borrow for a year or more at a fixed interest rate. During the term of the loan, you have to pay a fixed amount consisting of principal and interest, the monetary value of which remains stable. For example, let’s say you take out a S $ 10,000 installment loan over 1 year. flat rate of 5.5%. Since it is a flat rate, the total amount of interest you end up paying is S $ 550 (5.5% x S $ 10,000).
| Month | Principal remaining | Monthly payment | Main payment | Interest payment |
|---|---|---|---|---|
| 0 | 10,000 | – | – | – |
| 1 | 9,167 | 879 | 833 | 45.83 |
| 2 | 8 333 | 879 | 833 | 45.83 |
| 3 | 7,500 | 879 | 833 | 45.83 |
| 4 | 6 667 | 879 | 833 | 45.83 |
| 5 | 5 833 | 879 | 833 | 45.83 |
| 6 | 5,000 | 879 | 833 | 45.83 |
| 7 | 4,167 | 879 | 833 | 45.83 |
| 8 | 3 333 | 879 | 833 | 45.83 |
| 9 | 2,500 | 879 | 833 | 45.83 |
| ten | 1,667 | 879 | 833 | 45.83 |
| 11 | 833 | 879 | 833 | 45.83 |
| 12 | – | 879 | 833 | 45.83 |
| Total | 10,550 | 10,000 | 550 |
On the other hand, a personal line of credit is the total dollar amount that you can borrow at any time from your bank. You usually pay an annual fee to access this fund and only pay interest on the amount you have withdrawn from your line of credit at any one time. For example, suppose you opened a personal line of credit worth S $ 10,000. If you don’t borrow a dollar from this account, you won’t owe your bank a single dollar of interest. If you withdraw S $ 5,000 from your line of credit for 1 month, you will be charged interest approximately S $ 83 (S $ 5,000 x 20% / 12 months)
Personal installment loan vs personal line of credit
If you are trying to choose between getting a personal installment loan and getting a personal line of credit, the basic rule that you should adhere to is: use the installment loan for sudden and / or unavoidable expenses that are large ( and must therefore be repaid over a long period) and use a line of credit to supplement your unpredictable and / or inconsistent source of income for an amount that can be repaid relatively quickly.
| Type of personal loan | Best for … |
|---|---|
| Personal installment loan | Sudden and inevitable large expenses |
| Personal line of credit | People whose source of income is unpredictable or inconsistent |
| Balance transfers | Pay off a small amount of a credit card or personal loan over a few months |
| Debt Consolidation Plans | Pay off a small amount of a credit card or personal loan over a few years |
Installment loans are great for financing large expenses that need to be paid off over time, as its repayment schedule is spread over a few years at a relatively low interest rate, as we have shown above. On the other hand, if you try to use a line of credit the same way, it can get very expensive. For example, suppose you take a S $ 10,000 line of credit and pay it off as if it were an installment loan over 12 months. Since personal lines of credit typically charge a 20% interest rate, you could end up paying S $ 1,083 in interest – almost twice what an installment loan would have cost you.
| Month | Principal remaining | Monthly payment | Main payment | Interest payment |
|---|---|---|---|---|
| 0 | 10,000 | – | – | – |
| 1 | 9,167 | 1000 | 833 | 167 |
| 2 | 8 333 | 986 | 833 | 153 |
| 3 | 7,500 | 972 | 833 | 139 |
| 4 | 6 667 | 958 | 833 | 125 |
| 5 | 5 833 | 944 | 833 | 111 |
| 6 | 5,000 | 931 | 833 | 97 |
| 7 | 4,167 | 917 | 833 | 83 |
| 8 | 3 333 | 903 | 833 | 69 |
| 9 | 2,500 | 889 | 833 | 56 |
| ten | 1,667 | 875 | 833 | 42 |
| 11 | 833 | 861 | 833 | 28 |
| 12 | – | 847 | 833 | 14 |
| Total | 11 083 | 10,000 | 1,083 |
Likewise, if you only had to borrow S $ 1,000 every two months, you’d be much better off getting a line of credit. Every time you borrow S $ 1,000 for 1 month, you only owe S $ 16.67 interest, which equals S $ 100 if you do it 6 times in 1 year. On the other hand, getting a personal loan of S $ 6,000 for 1 year would cost you unnecessary S $ 330 (S $ 6,000 x 5.5%) in interest. Installment loans are simply not flexible enough for sporadic and temporary uses.
