How does the calculator compare the two payments?
For the installment loan, it uses the standard amortization formula with your amount, the annual rate divided by 12 and the term in months. That gives a fixed payment that clears the balance by the final month.
For the credit line, it simply charges one month of interest on the full amount: balance times rate divided by 12. There is no term because an interest-only payment has no payoff date built in.
The payment difference is the installment payment minus the interest-only payment. Total interest and total cost are shown only for the installment loan; for the line, the cost keeps growing for as long as the balance stays outstanding.
Installment payment = P × r × (1 + r)^n ÷ ((1 + r)^n − 1) Interest-only payment = P × r Difference = Installment payment − Interest-only payment
- P
- amount borrowed or drawn
- r
- monthly rate (annual rate ÷ 12)
- n
- installment term in months
Example: $48,000 drawn at 8.75%, or borrowed over 7 years
Scenario: Say a contractor needs $48,000 for equipment. At an illustrative 8.75%, she could draw it on a business credit line paying interest only, or take a 7-year installment loan.
- Monthly rate8.75% ÷ 12 = 0.72917% (0.0072917)
- Interest-only line payment$48,000 × 0.0875 ÷ 12 = $350.00
- Installment payment$48,000 over 84 months at 0.72917% = $766.20
- Payment difference$766.20 − $350.00 = $416.20, which in month one is almost exactly the principal repaid
- Installment total interest$766.20 × 84 − $48,000 = $16,360.80
- Line interest over the same 7 years$350.00 × 84 = $29,400.00, with $48,000 still owed
The line costs $416.20 less per month, but after 7 years it has cost $29,400.00 in interest and the full $48,000 remains, while the loan is paid off for $16,360.80 in interest.
Real credit lines often carry variable rates, so the interest-only payment can change from month to month.
When should you compare a loan with a credit line?
Funding a one-time purchase
For a single known cost, an installment loan forces repayment on a schedule. Comparing payments shows what that discipline costs per month.
Covering uneven cash flow
A line suits costs that come and go. The interest-only figure shows the carrying cost while a balance is out.
Weighing a home-equity line against a loan
Many home-equity lines allow interest-only payments during a draw period. Seeing the installment payment shows what repayment will eventually look like.
Stress-testing a draw period ending
Entering the remaining repayment years as the installment term previews the payment once interest-only ends.
What mistakes do borrowers make with interest-only lines?
Treating the payment gap as savings
The difference mostly repays principal on the loan. On the line, that money is still owed and still charging interest.
Paying only the minimum indefinitely
An interest-only balance can last for years. Without a plan to pay it down, interest keeps accruing on the full amount.
Ignoring the end of the draw period
When a line converts to repayment, the payment may jump to cover principal over a shorter time. Plan for that date early.
Assuming the rate stays fixed
Most lines are variable. A rate increase raises the interest-only payment right away.
Comparing a line's minimum with a loan's full payment
They do different jobs. Compare the cost of paying both down over the same period instead.
What does each option look like a few years in?
The table tracks the same $48,000 at 8.75% under both approaches. By year 3, the installment borrower has paid $27,583.20 and owes $30,936.92; the interest-only borrower has paid $12,600.00 and still owes all $48,000.
By the end of year 7, the installment loan is gone, at a total interest cost of $16,360.80. The line has cost $29,400.00 in interest, more than the loan's lifetime interest, and the full balance is still due. Paying the line down on your own schedule closes that gap, which is exactly what the installment structure does automatically.
| Time | Installment: paid so far | Installment: balance | Line: interest paid | Line: balance |
|---|---|---|---|---|
| After 1 year | $9,194.40 | $42,800.35 | $4,200.00 | $48,000.00 |
| After 3 years | $27,583.20 | $30,936.92 | $12,600.00 | $48,000.00 |
| After 5 years | $45,972.00 | $16,813.61 | $21,000.00 | $48,000.00 |
| After 7 years | $64,360.80 | $0.00 | $29,400.00 | $48,000.00 |
Terms used on this page
- Line of Credit
- A line of credit is a flexible borrowing account that lets you draw money up to a set limit, repay it, and borrow again. You pay interest only on the amount you have drawn, not on the full limit. Personal, business and home equity lines are common, and most carry variable interest rates.
- Principal
- Principal is the amount of money you borrow, or the amount you deposit, before any interest. On a loan, it is the balance that interest is charged against, and each payment's non-interest portion reduces it. On savings, principal is your own money, the base on which interest is earned.
- Amortization
- Amortization is the process of paying off a loan with equal, regular payments that each cover the interest due for the period plus a slice of principal. Early payments are mostly interest; later ones are mostly principal. By the final payment the balance reaches exactly zero, which is how most car, personal and student loans work.
- Interest Rate
- An interest rate is the price of money, stated as a percentage of the balance per year. Borrowers pay it to lenders, and savers earn it from banks. The rate alone does not include fees or compounding, so it can understate the true yearly cost of a loan or overstate a simple comparison of savings accounts.
Loan vs. Credit Line Payment: common questions
Is a line of credit cheaper than a personal loan?
It can be, if you borrow only what you need for short stretches and repay quickly, because you pay interest only on what is drawn. Carried for years with interest-only payments, a line usually costs more interest than an installment loan, since the balance never falls. Rates and fees also differ by product.
Why isn't my line of credit balance going down?
If you pay only the interest, nothing goes to principal, so the balance stays put. To shrink it, pay more than the interest charge. Any amount above interest reduces principal, which lowers next month's interest too. Your statement shows how much of each payment went where. Avoid new draws while paying it down, or the balance can creep back up.
What happens to my payment when the interest-only period ends?
New draws usually stop and the balance converts to a repayment period, during which payments cover principal and interest over a set number of years. The payment can rise sharply from the interest-only level. Run your remaining balance and repayment years as the installment term here to preview it. Planning for that jump a year or two ahead gives you time to pay down principal or refinance.
How does a credit line charge interest each month?
Typically as a daily rate applied to the balance each day, summed over the billing cycle. For a steady balance that works out to roughly balance times annual rate divided by 12 per month, which is what this calculator uses. Draws and repayments mid-cycle change the actual figure. Your card or line agreement explains the exact method, including how often the rate can change.
Is the payment difference the same as money saved?
No. It is mostly principal that the installment loan repays and the line does not. In the example, the $416.20 monthly gap in month one exactly matches the loan's first principal payment. On the line, that $48,000 is still owed. The lower payment simply defers repaying principal, and the line keeps charging interest on the full balance until you do. Over time that usually makes the line the more expensive choice.
Can I pay a line of credit like an installment loan?
Yes, and it is a good discipline. Pay the installment-loan amount shown here each month and the line will be cleared on the same schedule, assuming the rate stays the same and you make no new draws. If the rate rises, the payoff stretches a little longer. Setting up an automatic payment at that amount makes it easier to stick with.
Which is better for a large one-time expense?
For a single known cost with no plan to reborrow, an installment loan builds repayment in and usually has a fixed rate, which makes the total cost predictable. A line offers flexibility and lower required payments, at the risk of carrying the balance for longer. The right fit depends on your cash flow and discipline.
Do lines of credit have fixed or variable rates?
Most revolving lines have variable rates tied to a benchmark index, so the rate and the interest-only payment move with that index. Some lenders let you lock part of a balance at a fixed rate. Installment loans are more often fixed. This calculator uses one fixed rate for both. For a variable line, rerun the calculator at a higher rate to see how the payment could change.
Sources
- Regulation Z (Truth in Lending), 12 CFR Part 1026 — Consumer Financial Protection Bureau. Accessed October 17, 2026.
- Selected Interest Rates – H.15 release — Federal Reserve Board. Accessed October 17, 2026.
- Credit cards — Consumer Financial Protection Bureau. Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations, last checked October 17, 2026. See our methodology.