What is the difference between an installment loan and a revolving debt?
LOS ANGELES, June 14, 2021 / PRNewswire / – Two common types of debt are installment loans and revolving credit. Both can be used for a variety of purposes, from personal expenses to debt refinancing and more. Borrowers complete a credit application and go through a formal credit check to be considered for either, and both could help create credit. Finally, both can be secured (require collateral) or unsecured, although secured installment loans and unsecured credit cards are the most common variant of each.
Apart from that, each type of debt has different characteristics that make them more suitable for certain types of expenses. Here are some differences between installment loan vs revolving credit, and the pros and cons of each.
A installment loan (or installment credit) is a type of debt with a fixed, predetermined term and end date. They can have fixed or variable rates and usually include an amortization schedule, which slowly reduces the principal balance with fixed payments over time.
Here are some examples of installment loans:
- Auto loans
- Personal loans
- Refinancing loans
- Student loans
- Most business loans
With an installment loan, the borrower incurs a fixed amount of debt all at once. In some cases, it can even refinance later for a lower interest rate and monthly payment, which is especially useful for mortgages.
Revolving credit allows people to borrow as much as they want, when they want, up to a predetermined credit limit. The two main types of revolving credit are:
- Credit card
- Credit lines
If a borrower reaches that credit limit on their card or line, they can’t borrow any more money until they’ve paid off some of their revolving debt.
Credit cards in particular have several advantages when used wisely. Borrowers can earn points redeemable for cash back rewards or even travel. Travel cards offer many other travel benefits, such as TSA preclearance fees and refunds for checked baggage.
Revolving credit can also be useful for debt consolidation or for making one-time large purchases. Some credit cards offer an introductory 0% APR on balance transfers (so a borrower can transfer the debt to the card and pay it off without interest) and purchases for a specified period after opening.
Installment loans against revolving credit: the verdict
Installment loans are much more fixed in terms of payment amount and term, making them a consideration for large purchases (like a house, car, or furniture) and debt refinancing. In contrast, revolving credit can be more flexible. Borrowers can access the funds as per their requirement, which makes them excellent for building credit and day-to-day spending. Everyone has their time and place – and when used for the right purpose, can make a significant contribution to building a borrower’s credit and finances.
Note: The information provided in this article is provided for informational purposes only. Consult your financial advisor about your financial situation.
SOURCE Advancing America