Revolving Credit vs Installment Loans: The Differences
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.
Key Points
Major differences exist between revolving credit and installment loans, each with its own pros and cons.
Revolving credit can be reused repeatedly as long as you pay off or pay down the balance.
Installment loans provide a fixed repayment schedule and can often offer larger sums of money upfront.
Both revolving credit and installment loans can impact your credit score, but credit cards (a type of revolving credit) may have a slight advantage in building your credit score.
Personal loans are a type of installment loan.
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 such as 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 |
Interest is only paid on the amount of credit that has been used | Fixed number of payments |
Money can be borrowed, paid back, and borrowed again as many times as needed | Money is received in one lump sum |
Flexible monthly payments compared to installment credit accounts | Access to larger amounts of capital |
No interest if balance is paid off month to month (credit cards only) | Often comes with lower interest rates than revolving credit |
Typically does not require collateral | Depending on the lender, the money can often be received the same business day |
Revolving Credit Pros
The entire credit limit can be accessed numerous times: The entire amount of the credit limit can be received multiple times as long as it is paid off.
Interest is paid only on the amount of credit used: With revolving credit, borrowers only pay interest on the amount they use.
Flexible monthly payments: Because revolving credit allows minimum t repayments, monthly payments may be lower.
No interest if balance is paid in full each month: Credit card companies only charge interest if the balance isn’t paid in full every month.
Revolving credit can be unsecured: Borrowers may not 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 on 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 with 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 |
Comes with multiple fees | Borrowers aren’t given monthly payment amount options |
More expensive than installment credit | The 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 installment 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 with the lender and the remaining loan amount.
There is 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.
Recommended: Personal Loans: The Pros and Cons Explained
Examples of Revolving vs Installment Loans
Examples of installment loans include:
Personal loans
Business loans
Mortgages
Auto loans
Student loans
Buy now, pay later
Examples of revolving credit include:
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 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 your 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 number 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 them. 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 options from multiple lenders with a single application.
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