20 Mar

Installment loan and credit line – Differences & advantages and disadvantages

In terms of credit, terms are often used that are incomprehensible to laypeople or cause confusion, including the two terms installment credit and credit line. Both are technical terms for loans that are made available to private individuals by financial institutions. However, there are enormous differences between them, which you should definitely consider when concluding your loan contract.

These types of loans are the most commonly used financial products by consumers. They are also known as personal loans or bank loans. While a credit line is only offered by a few banks, almost all of the more than 200 banks operating in Germany offer installment loans. An installment loan is a loan that is provided by the bank to the borrower. This loan has a contractually agreed term during which it must be repaid. Terms of 12 to 120 months are common. Most installment loans must be repaid during the term with constant installments called installments. With some loans, however, the amount of the installments can depend on the general interest rate development and therefore fluctuate.

 

What are installment loans used for?

installment loans used for?

This type of loan is used to finance specific objects, such as furniture, electronic devices or even vacation trips. Real estate loans and car loans are installment loans with a special purpose. Due to the purpose limitation, the conditions for this special type of installment loan are better than those for loans that are intended for free use.

 

What is a credit line?

credit line

Framework credit is often also called an on-demand credit. A credit line is based on a contract that the borrower enters into with the financial institution. The bank grants the customer a loan, which he can draw up to the contractually agreed amount. How much credit of the granted credit line the customer draws on is up to him, since there is no minimum amount for the credit line. You only have to pay the contractually agreed interest for the amount that you actually used. When it comes to repayment, there are also big differences to the installment loan. Some banks require a certain minimum amount per month, the amount of which depends on the amount drawn from the credit line. Others even waive this minimum repayment and only request that the interest be paid.

 

When is an installment loan suitable and when is a framework loan?

When is an installment loan suitable and when is a framework loan?

An installment loan is particularly suitable for planned purchases where you already know the specific amount. This financing option offers low interest rates compared to other loans.

The credit line, on the other hand, is a cheap alternative to a credit line or credit card, since the interest rates are much lower. Once approved, the credit line is available at any time. Compared to a credit line or credit card, the credit line is much higher. Framework loans are ideal for customers who need to be financially flexible, for example for traders and small business owners who have to buy raw materials or goods regularly and do not want to apply for a new loan every time.

 

Advantages and disadvantages of installment credit and framework credit

credit loan

 

What are the advantages of an installment loan?

With an installment loan, you can precisely plan your financial burden. The loan agreement clearly states what the monthly rate you have to pay is. The rate already includes the cost of interest and fees. You can also get installment loans very easily. An ID card is usually sufficient for small amounts of just a few hundred dollars. Many retailers offer an installment loan such as zero percent financing if they sell certain products with financing. However, the dealer usually does not undertake the financing himself, but works with a bank. Another great advantage of installment loans is their easy comparability. On numerous comparison portals on the Internet, you can compare the offers of dozens of banks and view the interest rates and conditions in detail.

If you are employed and your income is above the garnishment-free limit, you do not need any additional collateral for an installment loan because the bank can use your attachable income as security.

 

Disadvantages of the installment loan

installment loan

If a long term is chosen for an installment loan, the monthly charge is minimal. This entices consumers to use several loans at the same time. If unforeseen circumstances such as

  • Accident,
  • Illness,
  • Unemployment or
  • divorce

changing circumstances, it is not uncommon for debtors to default on payments. The result is a credit record ruined for years that makes any borrowing impossible or even legal measures such as garnishment or enforcement.

 

The credit line and its advantages

A credit line is significantly cheaper than a credit line. The offers currently range from 2.99 to 6.55 percent interest and the maximum loan volume of 1,000 to 100,000 dollars. Unlike a overdraft facility, a framework credit is not linked to a checking account. Regardless of this, the money is freely available at any time. That makes this type of loan very flexible. The minimum repayment is just as flexible. It almost always accounts for only a small percentage of the loan drawn.

 

The credit line and its disadvantages

The credit line and its disadvantages

While you can apply for an installment loan from almost every bank, there are only a few banks that offer credit lines. Since a credit line is much larger than an average overdraft facility, the requirements for the borrower are much higher. If you want to take out a credit line, you must have an excellent credit rating and a good income. Not everyone can get this type of credit.

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