Installment Loans vs Revolving Credit

Revolving Credit vs. Installment Credit: What’s the difference?

How do they stack up?

There are two main kinds of credit repayments that are revolving credit and installment credit. Revolving credit lets borrowers use the borrowed money to repay it, then use it again.

The lender provides them with the amount they need to spend. The credit limit can be used at once or only in parts.

However, borrowers pay back installment credit loans through scheduled, regular installments. This kind of credit entails the gradual reduction in principal, and eventually, complete repayment, thus ending your credit cycle.

Revolving credit and installment credit can be found in secured and unsecured versions. However, it is more typical to find secured installment loans.

Key Takeaways

  • Installment credit allows borrowers to borrow an amount in one lump sum. Regular, fixed installments are made until the loan is fully paid.
  • Revolving credit permits a borrower to use the money borrowed for anything. You can pay it back and then borrow money more as you need to.
  • Credit lines and credit cards are two examples of revolving credit.
  • Some examples of installment loans include mortgages, student loans, auto loans as well as personal loans.

What is Revolving credit?

A credit card and an unsecured line of credit (LOC) are two popular kinds of credit that revolve. Your credit limit will not change as you make payments to your credit card account that is revolving. You can choose to take out loans up to a specific amount. 

However, this freedom often results in smaller borrowing amounts in addition to the higher interest rates. The borrower is liable for interest only on the amount they take and not the total credit limit.

Revolving credit could be the riskiest method to get credit as compared to installment credit. High balances can lower your score.

What is Installment Credit?

The most distinctive features in an installment loan account are the predetermined length of time and the end date, which is often called the duration that the creditor is obligated to. 

Typical installment loans include mortgages, student loans, auto loans, and personal loans. In each, you will know what your monthly payment is and the time for which you’ll pay them back. A credit application is needed for borrowing more money.

Revolving Credit vs. Installment Credit

Revolving Credit

  • You can pay the loan amount at any time, refund back, and borrow again when necessary.
  • Are higher interest, rates a possibility?
  • Borrowers pay interest only on the sum they draw

Installment Credit

  • Borrowers can access the amount of the loan in one lump amount
  • It can be harder to get
  • Fixed amount of payments that include interest throughout a specified period

Advantages and disadvantages of Installment credit

Installment credit comes with pros and cons. This is how it compares against the revolving credit accounts.

Predictable payments

With installment credit, you get your monthly payments for installment for a specific period, making budgeting much more accessible. 

Lower cost of borrowing

Credit card companies charge interest that increases every month. This happens if you don’t pay balances on time and in full.  The greater the interest rate, the higher the cost of carrying credit card debt in the long run.

In general, lenders who offer installment credit provide lower rates of interest for people with good credit. Many people take out installment loans to pay off their revolving debt.

There are pros and cons to this approach. Additionally, revolving loans can result in high-cost costs for late payments or for exceeding credit limits.

The disadvantages of installment credit

While there are some advantages when using the installment loan to repay expensive debt, revolving loans. However, there are drawbacks. One is that some lenders will not permit you to pay the balance of your loan.

This means that you cannot make payments that are higher than the minimum payment every month. Otherwise, you may pay a pre penalty fee. This is not usually an issue for the repayment of credit card debt.

Installment credit providers have stricter requirements regarding the amount of income they can provide, any outstanding debts, and credit score. The majority of credit card companies are more flexible regarding their lending practices, specifically for high-risk borrowers.

Tags

  • home equity line
  • revolving credit account
  • credit history
  • credit utilization ratio
  • car loans
  • personal finance
  • payment history
  • personal cash flow
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