Revolving Credit vs Installment Loans: The Differences

What Is Revolving Credit?

What Is Installment Credit?

Revolving vs Installment: The Pros

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. 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

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 

• Personal Loan
• Business Loan
• Home Loan/ Mortgage
• Auto Loan
• Student Loan
• Boat Loan

• 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?

Are Personal Loans Installment or Revolving Credit?

• 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 

• State or government-issued ID
• Paystubs
• Bank statements and tax returns
• Employer contact information
• Proof of address

The Takeaway