Installment loans are a handy tool for anyone looking to fund a large expense. However, they aren’t always the right choice. While you can use them for a variety of expenses, the lump sum and immediate repayment will hinder anyone who needs more flexibility.

A line of credit — either secured or unsecured — or credit card offers much more flexibility. You will only pay interest on the amount you spend, and you can keep repaying and respending as long as you need.

Lines of credit

Not every lender offers personal lines of credit — especially if you’re looking for an unsecured option. Despite this, they are a worthwhile alternative to a personal loan. This is because they offer more flexibility than a personal loan and often have lower interest rates than a credit card.

With a personal line of credit, you are able to spend what you need during the draw period and make interest-only payments. When your draw period is up your line of credit will be equivalent to a term loan you need to repay.

However, you may be required to provide some form of collateral, especially if you need to borrow a larger amount. Lenders may request you use a savings account, investment account or CD to secure your loan. Unsecured lines are less common than secured lines, and you may need to have a higher credit score to get access to competitive rates.

Benefits

  • Flexible spending.
  • Only pay interest on the amount you use.

Drawbacks

  • Less lender options to choose from.
  • Collateral may be required.

Credit cards

Credit cards can be difficult to manage if you aren’t on top of your spending. But because they offer some of the best perks — like cash back and travel rewards — they are one of the best options if you are able to use them with purpose.

Their high interest rates can be avoided if you pay back what you spend at the end of your billing period. The lower your balance at the end of each month, the less you will pay. This allows you to take advantage of the perks without being charged exorbitant rates.

That being said, the best cards also have steep annual fees. These will certainly be worth it if you have the income and credit score to qualify for top cards — and you plan to spend frequently. If not, you will need to ensure the benefits outweigh the amount you spend on the card each year.

Benefits

  • Membership perks like cash back or travel rewards.
  • No interest if you pay off what’s spent before the billing cycle ends.

Drawbacks

  • High interest rates compared to personal loans.
  • May come with steep annual fees.

Home equity lines of credit

A home equity line of credit (HELOC) is the best option if you need to cover a series of major expenses, like home renovations or school tuition. Most HELOCs have draw periods of 10 years, which gives you plenty of time to spend as needed. And in most cases, you can borrow up to 85 percent of your home’s equity. So if you’ve invested in your property, a HELOC can unlock a large amount of funds.

The major drawback is that your house is the collateral for the loan. If you aren’t able to repay, your bank or lender may choose to pursue foreclosure. The process isn’t immediate — and your lender may be willing to negotiate or extend alternate payment plans — but it is always a risk. Because it is such a big risk, rates tend to be quite low. Still, you’ll need to have the income and credit score to back your application if you want to secure the most funds at the lowest rates.

Benefits

  • Potential to deduct interest for certain expenses.
  • Interest-only payments during draw period.

Drawbacks

  • Risk foreclosure if unable to pay.
  • Home appraisal and other fees may be necessary.

When to get an installment loan

Lines of credit and credit cards are ultimately a tool you should use if you have frequent expenses to cover. An installment loan — like a personal loan or auto loan — is the right choice if you have one large expense you need to pay.

Installment loans are also good for locking in a rate. Because they have fixed interest rates, you will make the same monthly payment each month. This will help you budget for the future, which is nearly impossible for credit cards and lines of credit due to them having variable rates that fluctuate frequently.

The best option depends on your needs

Installment loans are a good, convenient option when you need to cover a big expense — but they aren’t always the right choice. If you need a more flexible option, then a credit card or line of credit will be the better choice. No matter what route you take, always compare lenders and apply for preapproval to find financing that fits your budget and needs.