Two common types of debt are installment loans and revolving credit. Both can be used for various purposes, from personal spending to refinancing debt and more. Borrowers fill out a credit application and submit to a formal credit check to be considered for either one, and both could help build credit. Lastly, both can be secured (require collateral) or unsecured, although secured installment loans and unsecured credit cards are the more common variant of each.
Aside from those, each type of debt has different features that make them more suitable for certain types of spending. Here are some differences between installment loans vs revolving credit, and each one's pros and cons.
Installment Loans
An installment loan (or installment credit) is a type of debt with a fixed, predetermined term length and end date. They can come with 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
- Mortgages
- Personal loans
- Refinancing loans
- Student loans
- Most business loans
With an installment loan, the borrower takes out a fixed amount of debt at once In some cases, they can even refinance down the road for a lower interest rate and monthly payment, which is especially helpful for mortgages.
Revolving Credit
Revolving credit lets people borrow as much as they want, whenever they want, up to a predetermined credit limit. The two main types of revolving credit are the following:
- Credit cards
- Credit lines
If a borrower reaches that credit limit on their card or line, they can't borrow more money until they pay down some of their revolving debt.
Credit cards in particular have several perks when used wisely. Borrowers can earn points redeemable for cash back or even travel. Travel cards offer plenty of other travel perks, like TSA precheck fees and checked baggage reimbursement.
Revolving credit can also be helpful for debt consolidation or making one-off large purchases. Some credit cards offer 0% introductory APRs on balance transfers (so a borrower can move debt to the card and pay it off interest-free) and purchases for a set amount of time after opening.
Installment Loans vs. Revolving Credit: The Verdict
Installment loans are much more fixed in payment amount and term length, making them a consideration for large purchases (such as a house, car, or furniture) and refinancing debt. On the other hand, revolving credit can be more flexible. Borrowers can access funds as needed, making them excellent for building credit and everyday spending. Each has its time and place — and when used for the right purposes, can contribute significantly to building a borrower's credit and finances.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.
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Original Source: Advance America: What's the Difference Between an Installment Loan and Revolving Debt?
