Introduction
Understanding the differences between installment loans vs. lines of credit is crucial for lenders today. Consumer credit trends continue to shift and evolve, and borrowers have access to more information about their options. This means lenders need to carefully consider their product mix to ensure they are prepared to meet demand. With clear knowledge about what makes each of these products different, financial institutions can provide the best overall service for their clients and maximize their opportunities.
What is an Installment Loan?
Under an installment loan, borrowers receive a fixed lump-sum amount and pay it off over a pre-determined period of time including interest. These personal loans are most commonly used for major purchases such as cars, but also other one-time expenses such as home improvement projects, unexpected bills and consolidating debt. Student loans are another example of installment loans. The median state cap for APR is 34% for the average two-year, $2,000 loan. Vergent LMS provides comprehensive support for managing installment loans out of the box, providing lenders with all the tools they need to keep track of these loan products. Installment credit tends to be less-complex for lenders to manage once they have been funded, but it’s important to have the right tools all the same.
What is a Line of Credit?
Like an installment loan, a line of credit provides borrowers with access to a fixed amount of funding. Unlike installment loans, however, borrowers can use only as much as they need or want, and only pay interest on the amount they have actually used. Revolving credit allows borrowers to use the same amount again once they have repaid the original amount they borrowed. These are used by individuals as well as many small businesses. For lenders, these represent higher yield potential but come with greater delinquency volatility. In the first quarter of 2025, the Federal Reserve Bank of St. Louis reported a delinquency rate of 2.77% for consumer loans.
Head-to-Head Comparison: Structure, Profit and Risk
Installment loans and lines of credit differ in some significant ways. For example, in terms of cash flow installment loans offer predictable amortized payments of principal plus interest. For lines of credit, however, the amount of the payment depends on the borrower’s usage. The cash flow depends on how often the borrower draws against the line.
The timelines for these products also differ, with installment loans having strictly defined timelines and cash flow ending as soon as the loan is fully paid. On the other hand, a line of credit has no fixed maturity and will remain open for as long as the borrower maintains an account. The impact on an institution’s liquidity is clear — installment loans offer far more predictability whereas lines of credit require much more attention and management from lenders.
Another key difference between these two types of products is in how each one impacts the KPIs lenders watch throughout the lifecycle of the product. For instance, net interest margin is more predictable with installment loans, because the margins are locked in at origination. Lines of credit, in contrast, have variable margins that can be higher as balances revolve and borrowers continue to carry interest-bearing debt. If the borrower’s utilization is low, it can pull the net interest margin down with it.
When it comes to charge-off rates, installment loans feature lower variability because risk is more predictable. Borrowers who default on the loan are much more likely to do so early in the loan’s lifecycle. Those with lines of credit can introduce more variability for lenders because they may continue to draw against their lines as their financial stresses increase, which in turn means there could be a spike in defaults.
Customer lifetime value (LTV) is another critical metric for borrowers. Installment loans have a finite LTV because the loan comes with a pre-determined end date, meaning cross-selling is necessary to extend the relationship with the borrower. The potential for high LTV is greater with lines of credit because accounts can remain active for years with ongoing revenue from interest and fees.
Underwriting and Decisioning Differences
Lenders must utilize different approaches on underwriting whether they’re providing an installment loan or a line of credit. In terms of an installment loan, it’s common practice to observe the prospective borrower’s debt-to-income ratio (DTI), which is an important measure of the borrower’s ability to repay the loan. Other metrics to consider include the borrower’s credit score and history, employment stability, and the value of any collateral in the case of a secured loan.
For lines of credit, risk is assessed using a different set of data points. These include the borrower’s credit utilization ratio if there are any existing lines of credit. The borrower’s history also may indicate whether he or she tends to carry balances or pay them off in full.
With so many details to track, it can be useful for a lender to rely on advanced software tools to help them keep tabs on their borrowers. Unlike traditional scorecards that use fixed, rules-based models, modern AI-tailored scorecards build dynamic, product-specific assessments that analyze patterns in historical data. Because they adapt based on the loan structure and borrower behavior, they provide a much more accurate look at the potential for risk and repayment.
Servicing & Collections Implications
In terms of servicing and collections, lines of credit tend to be costlier in the long run for lenders. This is because they require ongoing line reviews and minimum payment monitoring. In comparison, installment loans feature a finite schedule and declining balances that offer more predictability and therefore don’t call for as much in the way of management.
One recent development that has an impact on installment loan collections in particular is the new regulation from the Consumer Financial Protection Bureau regarding collection attempts. As of March 2025, installment and payday lenders are prohibited from attempting to withdraw money from a borrower’s account after two failed attempts without authorization from the borrower.
Choosing the Right Automation Platform
Vergent LMS provides lenders with an elegant solution for managing both installment loans and lines of credit. With features such as a real-time limit management module for lines of credit and an amortization scheduler for installment loans, it’s an all-in-one solution that enables lenders to make the most of both product types.
With the power of Vergent LMS at their sides, lenders can take full advantage of the benefits that come with offering installment loans and lines of credit. Our platform makes it easier to acquire and retain customers for both types of products, as well as creating cross-sell pathways to seamlessly transition customers from one to the other.
To learn more about everything the Vergent LMS software can do, reach out to book a demo.
FAQs on Installment Loans vs. Lines of Credit
Can one contract convert an installment loan into a line of credit?
It is possible for a lender to change the lending structure of a loan, but the process is more involved than a single contract can cover due to the differing structures of each type of credit.
How often should line of credit limits be re-evaluated?
In general, a lender should re-evaluate limits annually, although changes to certain risk factors may make it necessary to do so more often.
What system changes are needed to add a new product?
When using the Vergent LMS platform, lenders can make adjustments to their offerings as seamlessly as possible.
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If you want to learn more about what Vergent’s Loan Management System can do for you, get in touch with us today to schedule a demo and start seeing your KPIs clearer than you ever could.
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