Understanding Installment vs Revolving Credit

Key Takeaways:

• All personal loans fall into two categories: installment loans vs revolving credit.
• Each loan type has unique strengths and downsides.
• Installment loans and revolving credit are complementary; you need both to meet your financial needs.

The average American services several debts every month to afford large purchases and build credit to qualify for bigger loans in future. But to ensure that this credit plan works in your favor and you’re not caught up servicing loans for a long time, it’s essential to know how different types of credit work.

The first thing to note is that all debts fall into two categories, installment vs revolving credit. Understanding each loan type and how it compares to the other can equip you to select an ideal credit portfolio that lines up with your long-term credit plan. So, let’s define installment loans and revolving credit, and review their key differences.

Debt Fundamentals: Installment vs Revolving Credit

What is an Installment Loan? 

An Installment loan is any loan that provides funds in a lump sum, that you repay consistently over a defined period in monthly bits called installments. The amount you’re required to pay stays the same throughout the life of the loan, which spans between a few months to many years. Examples of installment credit are personal installment loans, student loans, auto loans, and mortgages.

What is Revolving Credit?

Revolving credit is a credit tool that allows you to borrow funds repeatedly up to a specified credit limit. With it, you can get emergency cash quickly without underwriting. In turn, you’re given a minimum amount to pay each month, but you can add to it or pay off the entire balance. The more you repay the loan, the more you replenish your credit allowance. Examples of revolving credit are lines of credit, credit cards, and home equity lines of credit. 

How They Compare: Installment Loan vs Revolving Credit

Here’s how installment vs revolving credit compare on various critical loan factors:

Borrowing limits

Installment loans have a minimum limit that dictates the least amount you can borrow, and a credit limit that sets the ceiling on what you can obtain. Conversely, revolving credit has no borrowing minimums. You only take out the amount you need, and this prevents unwanted debt.

Access to funds

Funding is the most prominent way to distinguish installment vs revolving credit. With installment loans, funds are disbursed once, in a lump sum, and you pay interest on the entire amount. With a revolving credit, you can access funds continually whenever need arises, which makes it a good source of funds for emergencies if you’re yet to build an emergency fund. As you pay down the balance, you increase the credit available to borrow again. 

Repayment terms

Installment loan repayment is predictable and stable because the amount to be paid each month is determined early on, but with revolving credit, except for the lender setting the minimum amount to pay each month, the amount of your payment can vary.

Impact on credit history

The impact that installment vs revolving credit has on your credit history is a weighty factor to consider when taking out new credit. To a lender, your ability to service installment loans shows that you can consistently and diligently repay what you owe but with revolving credit, above the consistency and diligence to repay debt, your repayment shows that you know how to manage your borrowing.

Revolving credit is more telling of your credit behavior because there are numerous decisions to be made, such as how much to borrow or how much to pay. An impeccable repayment history, even of a small revolving credit limit, carries significant weight because it infers that you’re responsible, reliable, and trustworthy. It’s one of the tools that can help you improve your credit score.

Interest rates

When comparing interest charged for installment vs revolving credit, the interest charged for installment credit is either variable, meaning that it shifts as market rates change or is fixed throughout the loan’s life. However, with revolving loans, you only owe interest on what you borrow. Installment loans typically have lower interest rates than revolving credit.

What To Choose: Installment Loan vs Revolving Credit

From the installment vs revolving credit comparison above, there’s no choosing between the two credit types because they are complementary. You need a mix of both. For example, since you cannot access credit severally with installment loans, you can maintain a revolving credit account for financial emergencies. Alternatively, since installment loans have lower interest rates, they’re preferable for large loans compared to revolving credit.

Minute Loan Center offers both types of financing, and the same easy requirements for both. You only need to prove your identity and have a regular income. Register today and place your loan requests. Our expert creditors process applications as they come, and we’ll approve your loan promptly.