Personal loans and lines of credit are common options when you need to borrow money But is a personal loan considered installment or revolving credit? The answer lies in how these two debt products work
I’ll explain the key differences between installment loans like personal loans and revolving credit like credit cards and lines of credit. With this knowledge, you can choose the borrowing option that best fits your needs.
Installment Loans Provide a Lump Sum Upfront
Installment loans give you an upfront lump sum of cash, then you repay the loan in regular installments until it’s paid off Some examples of installment loans are
- Mortgages
- Auto loans
- Student loans
- Personal loans
A big benefit of installment loans is you can get the full loan amount you need right away. This makes them useful when you need a specific amount of money for a large purchase or to consolidate other debts.
The payment schedule on an installment loan is structured so you pay down the balance over a set term. For instance, a $10,000 personal loan may have a 36-month term with monthly payments of around $295.
Most installment loans have fixed interest rates as well. This helps keep your monthly payments predictable. Personal loans for borrowers with good credit often have rates between 6% and 36%.
Revolving Credit Offers Flexible Borrowing
Revolving credit gives you access to a credit line you can borrow against as needed. Credit cards and home equity lines of credit (HELOCs) are two common types of revolving credit.
With a credit card or line of credit, you typically have a credit limit, such as $5,000. As long as you have available credit, you can use the card or tap the line to make purchases or withdraw cash.
As you make payments, your credit frees up so you can continue using the account. The main exceptions are secured credit cards and lines of credit, which may not allow reuse of credit until balances are paid down.
Interest rates on revolving credit lines tend to be variable, meaning they can go up or down. Credit cards often have higher interest rates than installment loans, commonly 15% to 25%.
Installment Loans Have Fixed Payments, Revolving Credit Is Flexible
The structured payments of an installment loan can make it easier to budget and repay debt on time. You’ll know exactly what your monthly loan payment will be over the full term.
Revolving credit is more flexible since there’s no set repayment schedule. As long as you make the minimum payment, usually 1% to 3% of your balance, the account stays in good standing.
However, only making minimum payments results in more interest charges and can make balances linger. It’s best to pay your full revolving credit balance monthly if possible.
Which Is Better for You?
When deciding between an installment loan or revolving credit, consider your borrowing needs:
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If you need a set amount for a large purchase, an installment loan gets you the full funds upfront. And steady payments help ensure the debt gets repaid over the term.
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If you have ongoing borrowing needs, revolving credit offers convenience and flexibility. You can keep using the funds as long as you have available credit and keep up with minimum payments.
Whichever option you choose, make payments on time and avoid carrying balances when possible. This keeps borrowing costs low while helping you build an excellent credit history.
With some smart comparison shopping, you can find an installment loan or revolving credit line well-suited for your situation. Just be sure to read the terms closely and borrow responsibly.
Revolving vs. installment credit: Which should you have?
To maintain a good credit score, its important to have both installment loans and revolving credit, but revolving credit tends to matter more than the other.
Installment loans (student loans, mortgages and car loans) show that you can pay back borrowed money consistently over time. Meanwhile, credit cards (revolving debt) show that you can take out varying amounts of money every month and manage your personal cash flow to pay it back.
Lenders are much more interested in your revolving credit accounts, says Jim Droske, president of Illinois Credit Services. So while you may have a large auto loan of over $20,000, lenders look much more closely at your credit cards — even if you have a very small credit limit.
“Assuming both obligations are always paid as agreed, a credit card with a $500 limit can have a greater impact on your credit scores versus a $20,000 auto loan,” Droske tells CNBC Select.
Its important to pay both bills on time each month, as on-time payments make up 35% of your credit score. But only credit cards show if youll be a reliable customer in the long run, he explains. Because your balance is constantly in-flux, credit cards demonstrate how well you plan ahead and prepare for variable expenses.
“Credit scores are predicting future behavior, so the scoring models are looking for clues of your good and bad history,” Droske (who has a perfect credit score) says.
With a credit card, your balance could be under $1,000 in one month, then three times as large the next. If your history shows that you manage your money consistently enough to cover varying costs, then lenders know youre probably reliable enough to borrow more money in the future.
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Having a mix of credit products in your name — such as a couple of credit card accounts and a mortgage or auto loan — helps to strengthen your overall credit profile.
These credit products fall under two main categories: revolving credit and installment credit. Lenders like to see that you have both because it shows them you can manage the many different obligations that come with borrowing all kinds of debt.
While these two kinds of credit are different, one is better than the other when it comes to improving your credit score. No matter the size of the balance, the interest rate or even the credit limit, revolving credit is much more reflective of how you manage your money than an installment loan.
Below, CNBC Select spoke to a credit score expert to understand the difference.
Installment vs Revolving Loans
FAQ
Is a personal loan an installment loan?
Is a revolving loan a personal loan?
Is an installment loan revolving?
Is a student loan installment or revolving?
Are personal loans revolving credit or installment credit?
Personal loans are considered installment credit rather than revolving credit because they involve borrowing a set amount of money and repaying it in regular installments over a predetermined period. Unlike revolving credit, which offers a line of credit to use repeatedly within a specific limit, personal loans are one-time transactions.
Is a revolving credit loan better than an installment loan?
If you have a low credit score, revolving credit will likely be more accessible than an installment loan. But keep in mind: Most revolving credit accounts use variable interest rates. And, your minimum payment will also depend on how much you’ve borrowed for the month. Is A Personal Loan An Installment Loan Or Revolving Credit?
Are personal loans revolving?
Personal loans are considered installment credit because they provide borrowers with a fixed amount upfront, which they repay over time with fixed monthly payments. However, personal lines of credit are revolving, allowing borrowers to borrow and repay the funds as often as they wish.
Are personal loans revolving or installment debt?
Now that we’ve clearly defined installment and revolving debt, you might be wondering which category a personal loan fits into. Since personal loans are repaid in fixed monthly payments over a repayment term, they’re considered installment debt.
What is a revolving credit loan?
Common installment loans include mortgages, auto loans, student loans, and personal loans. With each of these, you know how much your monthly payment is and how long you will have to make payments. If you want to borrow more money at any point you’ll have to take out another loan. Revolving credit is flexible.
What is the difference between revolving debt and installment loans?
Now you know the key differences between revolving debt and installment loans, which include: How borrowing works: With installment loans, you’re approved to borrow a fixed amount and can’t access more money unless you apply for a new loan. With revolving debt, you’re given a maximum credit limit and can borrow as much or as little as you want.