App version: 0.1.0

Revolving Credit vs Installment Loans: The Differences

Revolving Credit vs Installment Loans: The Differences
Lauren Ward
Lauren WardUpdated June 21, 2022
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
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.If you’re on the fence deciding between a personal installment loan or revolving credit, learn about the pros and cons of each. 

What Is Revolving Credit?

If you understand what credit cards are then you understand what revolving credit is. 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.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. 

What Is Installment Credit?

If you’ve been wondering, “Is a personal loan installment 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 creditRecommended: Purpose of a personal loan.  

Revolving vs Installment: The Pros

Revolving vs installment credit (or open-end vs closed-end) 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. 

Revolving Credit Pros

  • Entire credit limit can be accessed numerous times as long as 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.
  • 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.

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.  

Examples of Revolving vs Installment Loans 

Installment Credit Examples:
  • Personal Loan
  • Business Loan
  • Home Loan/ Mortgage
  • Auto Loan
  • Student Loan
  • Boat Loan
Revolving Credit Examples:
  • Credit Cards
  • Personal Lines of Credit
  • Business Lines of Credit
  • Home Equity Lines of Credit

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 your score. That said, credit cards may improve 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 will improve your credit score, but credit cards may have a slight advantage.   

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 are 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 are. 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 loansOnce you’ve decided on what you want, the application process is easy. To apply you’ll need:
  • State or government-issued ID
  • Paystubs
  • Bank statements and tax returns
  • Employer contact information
  • Proof of address

The Takeaway 

With revolving credit, borrowers can access the credit limit as many times as they choose, provided they pay off the balance. Interest rates are high, but the monthly payments are low. Installment credit gives the borrower the entire loan in one lump sum. The monthly payments are higher, but they have a defined end and lower interest rates — meaning they’re cheaper for the borrower than revolving credit. Compare personal loan interest rates at Lantern. At Lantern by SoFi, you can choose your loan amount, interest type, and repayment length and then compare offers from multiple lenders with a single application. 
Photo credit: iStock/andresr
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.LCPL0322015

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?

About the Author

Lauren Ward

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.
Share this article: