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There are some major differences between installment loans and revolving credit. For starters, installment loans come in one lump sum, but revolving credit can be accessed multiple times as long as the balance is paid off or down. Payment options differ greatly, as well.Keep reading to learn about installment loans vs revolving credit, how they differ, and which type of lending product may be best for you.
What Is Revolving Credit?
With revolving credit, you’re given a credit limit, and that amount is the maximum amount of money you can borrow. When you spend money, the amount available to you decreases by the amount you spend. If you were to pay off or pay down your balance, your available credit would increase. The best example of revolving credit is a credit card.Another word for revolving credit is open-end credit. This is because borrowers don’t have a defined final payment date with revolving credit. The monthly payment depends on the amount of credit that has been used, but even then, borrowers can opt to make a minimum payment instead of paying off the entire amount used in that billing cycle. Recommended: Open-End Credit vs Closed-End Credit
What Is Installment Credit?
If you’ve been wondering if a personal loan is an installment loan or revolving credit, the answer is installment. Installment credit is what you think of when you consider loans like car loans, mortgages, and personal loans. The amount of credit is given to the borrower in one lump sum, interest is received on the entire amount borrowed, and there is a start and end date for all payments. In other words, it’s a type of closed-end credit.
Revolving vs Installment: The Pros
Revolving vs installment credit is a debate that many borrowers may struggle with. The reason for this is that there are benefits to both sides of the credit equation.
Pros of Revolving Credit
Pros of Installment Credit
Borrowers only pay interest on the amount of money they have used
Fixed amount of payments
Money can be borrowed, paid back, and borrowed again as many times as needed
Money is received in one lump sum
Lower monthly payments than installment credit accounts
Can get access to larger amounts of capital
No interest if balance is paid off month to month
Often comes with lower interest rates than revolving credit
Does not require collateral
Depending on the lender, the money can often be received the same business day
Revolving Credit Pros
Entire credit limit can be accessed numerous times as long as the balance is repaid: The entire amount of the credit limit can be received multiple times as long as it is paid off.
Only pay interest on the amount of credit that is used: With revolving credit, borrowers only pay interest on the amount they use.
Low monthly payments: Because revolving credit doesn’t require a set repayment schedule, the monthly payments are lower.
No interest if balance is paid in full month to month: Credit card companies only charge interest if the balance isn’t paid in full every month.
Revolving credit is unsecured: Borrowers don’t have to secure the credit line with any collateral such as a house or car.
Installment Credit Pros
Fast disbursement: It’s possible to receive the credit the same business day.
Lower interest rates: Many installment loans come with lower interest rates than revolving credit products.
More money: It’s easier to get more money with an installment loan than it is a revolving credit line. So if you're remodeling your bedroom, for instance, an installment loan could be helpful.
One lump sum: Borrowers get access to the entire loan amount all at once.
Fixed amount of payments: Installment credit comes with a set number of payments, so payments don’t go on indefinitely.
Revolving vs Installment: The Cons
The argument to settle the installment vs revolving credit for each borrower sometimes comes down to the drawbacks — or in this case, the fees.
Cons of Revolving Credit
Cons of Installment Credit
Credit cards may raise interest rates if the borrower is late or misses a payment
Lender may charge a prepayment fee
Come with multiple fees
Borrowers aren’t given monthly payment amount options
More expensive than installment credit
Lender may charge a loan origination fee
Revolving Credit Cons
Missed payments often result in higher interest rates: Credit card companies are known to raise rates if a borrower is late on payments.
Credit cards sometimes come with numerous fees: Each company has its own fees and the amount it will charge its borrowers. Common fees include:
Late payment fee
Annual fee
Foreign transaction fee
Over the limit fee
Returned payment fee
Balance transfer fee
Interest
Credit cards typically come with higher interest rates than installment credit: Most loans come with lower interest rates than credit cards.
Installment Credit Cons
Some lenders charge a prepayment fee for paying off a loan early: The amount of the fee varies on the lender and the remaining loan amount; however, many lenders don’t charge a prepayment fee.
Less flexibility on monthly payments: Installment credit requires full monthly payment to avoid fees. Borrowers aren’t given payment amount options as they are with credit cards.
Installment credit often comes with origination fees: The amount of the fee depends on the loan amount and the lender.
Revolving vs Installment: Which Type of Debt Makes a Bigger Impact on Your Credit Score?
The biggest contributor to your credit score is your payment history, which accounts for 35% of your credit score. Therefore, having a history of on-time payments with either revolving credit or installment credit will help build your score. That said, credit cards may build your score more than a personal loan if you use them correctly. Experian, a major credit bureau, says that any credit utilization ratio below 30% is good for your credit score.If you keep your credit cards open, they can also contribute to your credit history (15%), as well as credit mix (10%). However, installment credit can also be used for a credit mix boost. Plus, it can be used to pay off credit card debt to get your credit utilization ratio down. Therefore, both can build your credit score, but credit cards may have a slight advantage. Just be aware of increasing interest rates.
Are Personal Loans Installment or Revolving Credit?
Personal loans are installment credit. This is because:
Borrowers receive the entire loan amount at the same time.
There is a fixed amount of payments until the loan is paid in full.
The full loan amount is only available once — borrowers would need to apply for another loan to receive the same amount of cash again.
Applying for an Installment Loan
Some installment credit options are secured, but not all of them. For example, student loans and personal loans are both usually unsecured, which means the borrower doesn’t have to use collateral to secure it. So the good news is that if you’ve been thinking about getting an unsecured personal loan, you’re going to have options. In many situations, secured loans come with lower interest rates than unsecured loans because secured loans are less of a risk to the lender if the borrower defaults on payments. Depending on what you need the loan for, it might be worthwhile to compare the rates of secured and unsecured loans. Once you’ve decided on what you want, the application process is straightforward. To apply, you’ll need:
State or government-issued ID
Paystubs
Bank statements and tax returns
Employer contact information
Proof of address
The Takeaway
Revolving credit allows borrowers to access the credit limit as many times as they choose, provided they pay off the balance. With credit cards, though, interest rates may be high, so it’s best to pay off the balance in full each month.Installment credit gives the borrower the entire loan in one lump sum. The monthly payments may be higher, but they have a defined end and lower interest rates — meaning they’re cheaper for the borrower than revolving credit. If you’re interested in a personal loan, consider Lantern by SoFi. At Lantern, you can choose your loan amount, interest type, and repayment length and then compare offers from multiple lenders with a single application.
Frequently Asked Questions
Is a personal loan considered revolving credit?
What is the difference between a personal loan and revolving credit?
What types of loans are revolving?
Photo credit: iStock/andresr
LCPL-Q224-1920174-V1
About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
