Personal installment loan vs personal line of credit: how to choose?

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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 learn 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 must pay a fixed amount consisting of principal and interest, the dollar value of which remains stable. For example, suppose you take out an installment loan of S$10,000 for 1 year at a flat rate of 5.5%. Since this is a flat rate, the total amount of interest you end up paying is S$550 (5.5% x S$10,000).

Month Remaining capital 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

In contrast, a personal line of credit is the total amount of dollars you can borrow from your bank at any given time. You typically pay an annual fee to access this fund and only pay interest on the amount you have drawn on your line of credit at any given time. For example, suppose you have a personal line of credit worth S$10,000. If you end up not borrowing a dollar from that account, you won’t owe your bank a single dollar in interest. If you withdraw S$5,000 from your line of credit for 1 month, you will be charged approximately S$83 in interest (S$5,000 x 20% / 12 months)

Personal Installment Loan vs Personal Line of Credit

If you’re trying to decide between getting a personal installment loan or getting a personal line of credit, the rule of thumb you should follow is this: use an installment loan for sudden and/or unavoidable expenses that are important (and therefore need to be repaid over a long period of time), and use a line of credit to supplement your unpredictable and/or inconsistent source of income for an amount of money that can be repaid relatively quickly.

Type of personal loan Best for…
Personal installment loan Large, sudden and unavoidable expenses
Personal line of credit People whose source of income is unpredictable or inconsistent
Balance transfers Repay a small amount of credit card or personal loan over a few months
Debt consolidation plans Paying off a small amount of credit card or personal loan over a few years

Installment loans are great for financing large expenses that need to be paid over time, as its repayment schedule is spread over a few years at a relatively low interest rate, as shown above. On the other hand, if you try to use a line of credit in the same way, it can cost you dearly. For example, suppose you take out a line of credit of S$10,000 and repay it as if it were an installment loan over a period of 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 Remaining capital Monthly payment Main payment Interest payment
0 10,000
1 9,167 1,000 833 167
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 needed to borrow S$1,000 for 1 month 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 would only have to pay an interest of S$16.67, which would be S$100 if you borrow 6 times in 1 year. On the other hand, getting a personal loan of S$6,000 for 1 year would cost you unnecessarily S$330 (S$6,000 x 5.5%) in interest. Installment loans are simply not flexible enough for sporadic and temporary uses.

compare the cost of personal line of credit and personal installment loan to show when line of credit is better
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