If you need a loan, you will likely have to decide between a few options. Loans can be significantly different from one another in several ways. Sometimes one can require an asset while another does not, they can be short-term or long-term, and they can be installment or revolving loans. Installment loans are precisely what they sound like—they are repaid in steady monthly payments. While revolving loans can change with their monthly payments, depending on usage. These are just some fundamental characteristics; continue reading to learn more about the differences between installment and revolving loans.
More Details on Installment Loans
As mentioned earlier, installment loans are loan options repaid in regular monthly payments. However, other things are notable about these types of loans, especially when comparing them to revolving credit. An Installment credit account usually provides funds in a lump sum, meaning you cannot borrow from it again. If you need more money, you will have to apply for a new installment loan.
An Example of Repayment With an Installment Loan
To get a better idea of how these loans work, it will be helpful to see an example. Let’s say that you take out an installment loan for $10,000 that has an interest rate of 5% and needs to be repaid in 24 months. Because the loan is an installment loan, you will have to make equal monthly payments until the loan terms are over, in this case for 2 years. With that interest rate, the monthly payments will be approximately $438.
Pros and Cons of Installment Loans
There are definitely pros and cons of installment loans, and you should consider them before you decide that one of these loans is right for you.
Here Are Some Advantages of Installments Loans You Can Look Forward To:
These loans are perfect if you want a predictable repayment schedule. As long as you make your payments on time, the monthly amount should stay the same. Because of this, they can also be fairly easy to fit into almost any budgeting plan.
Installment loans can come with competitive interest rates and repayment terms, depending on the loan type you choose.
Again, depending on the loan type, you may be able to get a large or small loan amount, so there is flexibility for all kinds of different uses.
Here Are Some Disadvantages of Installment Loans:
You will only be able to borrow once with one of these loans. If you need more money, you’ll have to fill out another application, go through a credit check, and submit all your documents again.
Not all installment loans have competitive interest rates, especially if you have a low credit score; however, this is not unique to installment loans.
Having the same amount due each month can be challenging if your finances change during loan repayment.
Examples of Installment Loans
Installment loans are some of the most common loan options out there, and chances are you’ve already taken one out before. Here are some examples of installment loans:
Car loans/auto loans are used to finance a vehicle purchase. You can find them at banks, credit unions, online lenders, and dealerships. These loans can only be used for a vehicle purchase. Generally, loan amounts start at a few thousand dollars and go up to hundreds of thousands. Once you use the funds from your car loan, you will have to pay them back in equal monthly installments.
Personal loans can be used for almost any expense and are available in a wide range of loan amounts. With these loans, you will get the funds upfront as a lump sum, and you can use them as you need to. Repayment will include steady monthly payments until the loan is paid back in full.
Home Equity Loans
Home equity loans are a type of secured funding that use the borrower’s home as collateral. Many people use these loans for home repairs or improvements, but the funds can be used for almost anything. Just like car and personal loans, you will get the funds from this option upfront and repay them in equal payments.
Student loans can help you pay for any type of educational expense. If you are approved for one of these loans, the funds will be sent straight to the school. With student loans, you usually won’t have to start repaying the loan until a few months after you graduate, giving you the time and convenience to get on your feet. These loans are also repaid in steady monthly payments.
A Further Explanation of Revolving Loans
Revolving credit accounts or loans are a type of funding you can borrow from multiple times until you reach your credit limit. Once you reach your entire credit limit, you can make payments on your loan/credit account to use it again. You can continue doing this as long as you want! Unlike installment credit loans, the monthly payment on these loans can change depending on how often you use your credit account.
Advantages and Disadvantages of Revolving Loans and Revolving Credit
There are a few different advantages and disadvantages of revolving debt you should know about; here are some of them:
Some Pros of Revolving Credit Accounts:
- You can borrow from these accounts more than once without going through a whole new credit application, which can be highly convenient during an emergency or an unexpected expense.
- Paying these accounts on time can have a double positive impact on your credit score, as it can decrease your credit utilization ratio.
- You may get credit limit increases for simply paying your account on time, and that can help your credit score!
- If your income changes through repayment, you can decrease the usage on the revolving loan, and your minimum payment due can be zero or a very low amount.
Some Disadvantages of Revolving Credit Accounts:
- Revolving credit can quickly lead to a cycle of debt if not paid back responsibly.
- Interest rates for these loans may be higher than installment loans or credit accounts.
- If you want a steady payment schedule, then revolving accounts are not for you.
- It may be hard to get approved for a revolving credit account vs. an installment loan.
Examples of Revolving Loans
There are various kinds of revolving loans and credit accounts you can look into. Here are some examples:
Credit Card Debt
Credit cards are considered revolving loans and are some of the most popular lending options available. These loans can come with rewards like cash back, travel rewards, and discounts at different retailers. The amount that will be due every month will be based on your spending for that period.
A Personal Line of Credit
A personal line of credit is similar to a personal loan, as it can be used for almost any expense. However, you won’t get the funding in a lump sum; instead, you can borrow from the loan as you need.
Home Equity Lines of Credit
Home equity lines, like home equity loans, allow borrowers to use their home’s equity to borrow money. However, you can borrow from them as you need, making them a good choice if you are still determining the total cost you need to borrow.
A Business Line of Credit
A business line of credit allows business owners to finance their business’s start, maintenance, and growth periods. With these loans, business owners don’t need to worry about knowing exactly how much they need to borrow.
General Requirements for an Installment Loan and Revolving Credit Account
For most installment loans, you’ll need to prove your identity and your income. You can verify your income with documents like paystubs, bank statements, and letters of income. The flexible thing is that many lenders don’t require you to have a traditional full-time job; you just need a source of income. Even non-traditional jobs and forms of employment will work, such as retirement income, rewards, and contract work. To prove your identity, you need to provide a government-issued photo ID and documents verifying your address, such as utility bills, lease or mortgage statements, and bank statements.
You will also have to go through a credit check, as lenders will want to pull your credit report to check your credit score and credit history. Your credit history will have important information for lenders, including your credit utilization ratio, payment history, and the types of credit accounts you have. There are some lenders out there that may have a minimum credit requirement, while others will be more flexible. Financial institutions like banks and credit unions tend to be stricter, while online lenders tend to be more flexible.
The Bottom Line With Installment vs. Revolving Credit Accounts
Installment loans are credit accounts repaid in equal payments, while revolving account payment requirements will change depending on usage. Installment accounts will work best if you know exactly how much money you need to borrow and want predictability with your payments. Revolving credit accounts work best if you are unsure how much money you need to borrow, want to build your credit, and don’t mind a little bit of instability on your payments.