Installment Loans vs Revolving Credit: What’s the Difference?

When looking at loan options, you likely come across a few different types, including installment loans vs revolving credit. These types of loans have differences, and it’s important to know about them if you are choosing between the two. Below is more information on these loan types. 

The Main Difference Between Revolving Credit vs Installment Credit

The key difference between these loan types is that with installment loans, you borrow once and pay it back in monthly installments. In contrast, with revolving credit, you can borrow several times until you reach your credit limit. And so, when you make a monthly payment to your revolving credit account, you can borrow money again. 

Along with this major difference, there are some other differences between revolving and installment credit you should know about: 

Simple Interest Rates vs Compound Interest Rates

Most installment loans have simple interest while revolving credit usually has compound interest. With simple interest, your rate will be calculated at the beginning of the loan and will be based solely on the principal amount. While compound interest is calculated each month on interest and principal. Learn more about simple and compound interest rates to figure out which one is right for you.

Steady Monthly Payments vs Variable Monthly Payments

Installment credit will come with predictable and steady payments, as long as you pay on time. While revolving credit accounts have payments that can fluctuate based on the balance. And so, some months, you may be looking at a larger payment than previous, depending on how much you used that account.

Differences With Eligibility Requirements 

When researching your loan and credit options, you’ll find that installment loans offer easier eligibility for borrowers with a low credit score than revolving credit accounts. However, installment loans can be more challenging to qualify for when applying for high loan amounts. 

Examples of Installment Credit and Loans

Below are some examples of installment credit options you can look into:

  • Personal loans — A personal loan is an unsecured loan. Interest rates and repayment terms are based on your finances and the lender you choose to work with. These loans are incredibly versatile, and you may be eligible even with bad credit. 
  • Payday loans — A payday loan is a bad credit loan that uses a borrower’s paycheck to secure funding. Payday loans, although convenient for borrowers with bad credit history, come with high interest rates. 
  • Car title loans — A car title loan uses the borrower’s vehicle as collateral. Eligibility is based on the value of the vehicle and income rather than a credit score. 
  • Car loans — A car loan is used to finance a car. You may need a down payment for a car loan.  
  • Home equity loans —A home equity loan is an installment loan that uses a home’s equity to make funds available. 

Examples of Revolving Debt

Here are some examples of revolving credit types: 

  • Credit cards — A credit card is the most common type of revolving credit account you will find. If you qualify, you can have more than one credit card, but having several credit cards may not be the best idea
  • HELOC — A home equity line of credit or HELOC is where homeowners can borrow from their home’s equity as a credit line. 
  • Personal lines of credit — Personal lines of credit are similar to personal loans in eligibility and that they can be used for all expenses. 

Pros and Cons of Installment Loans vs Revolving Credit

There are a few pros and cons of installment loans/credit and revolving credit. Here is more information on them to help you decide which option is best for you. 

The Advantages of Installment Loans

  • Predictable monthly payments — Installment loans are a good option if you want steady monthly payments and don’t want to worry about how much money you are spending with your loan. 
  • Interest is only added to the principal — Interest is only collected on the principal, which can mean paying less interest than revolving credit. 
  • Get a great interest rate if you have good credit — With a good credit score, you can  look forward to competitive rates with the right loan. 

Disadvantages of Installment Loans

  • You’ll need to apply for funds again for more money — Once you use the funds from an installment loan, that is the end of the money you can borrow from that loan. If you want to borrow more money, you must fill out a new application. And so, these loans are a one-time help that may not be the most convenient. 

The Advantages of Revolving Credit Accounts

  • Borrow several times — With revolving credit, you can borrow multiple times, which can be highly convenient. 
  • Can be a good tool to build credit — With revolving credit, because you can use as little as you want multiple times, you’ll have more opportunity to make manageable monthly payments. And making on-time payments can really help boost your credit score quickly. 
  • Credit cards can come with perks — One of the most common revolving financial products are credit cards. A credit card can come with many perks simply for spending money. You’ll come across rewards like cash back, travel perks, and general discounts with specific merchants. Just make sure you keep track of your total balance. 

Disadvantages of Revolving Credit

  • Can lead to a cycle of debt — Revolving credit can quickly become expensive if you have a high balance. And so, these kinds of credit accounts can become unmanageable and lead to debt. For example, many credit card owners have to seek credit card consolidation or other debt management techniques to pay off their credit card balances. So keep that in mind when considering revolving credit. 
  • You may get better rates with installment credit — If you have good credit you may get better interest rates with installment loans.