What is the difference between an installment loan and a revolving debt?

LOS ANGELES, June 14, 2021 / PRNewswire / – Two common types of debt are installment loans and revolving loans. Both can be used for a variety of purposes, from personal expenses to debt refinancing and more. Borrowers fill out a loan application and undergo a formal credit check to be considered for either, and either of them can help build credit. Finally, both can be secured (require collateral) or unsecured, although secured installment loans and unsecured credit cards are the more common variant.

That being said, each type of debt has different characteristics that make it more suitable for certain types of expenses. Here are some differences between Installment Loan vs Revolving Loan, and each its advantages and disadvantages.

Installment Loans
A Installment loan (or installment loan) is a type of debt with a fixed, predetermined term and end date. They can come with fixed or floating rates and usually include a repayment schedule – which slowly reduces the principal balance with fixed payments over time.

Here are some examples of installment loans:

  • Car loans
  • Mortgages
  • Personal Loans
  • Refinancing Loans
  • Student Loans
  • Most business loans

With an installment loan, the borrower takes on a fixed amount of debt at once. In some cases, he can even refinance himself at lower interest rates and monthly payments, which is especially helpful with mortgages.

Revolving Credit
Revolving loans allow people to borrow as much as they want, whenever they want, up to a predetermined credit limit. The two main types of revolving credit are as follows:

  • Credit cards
  • Credit lines

If a borrower reaches this credit limit on their card or credit line, they will not be able to borrow any more until they have paid off some of their revolving debt.

Credit cards in particular have several advantages when used wisely. Borrowers can collect points that can be redeemed for cashback or even travel. Travel Cards offer many other travel perks, such as TSA pre-screening fees and checked baggage reimbursements.

A revolving loan can also help with debt consolidation or one-time bulk purchases. Some credit cards offer 0% introductory APRs for balance transfers (so a borrower can transfer debt to the card and pay off interest-free) and purchases for a period of time after opening.

Installment Loan vs. Revolving Loan: The Verdict
Installment loans are much more solid in terms of payment amount and term, making them suitable for large purchases (like a house, car, or furniture) and refinancing debt. On the other hand, revolving loans can be more flexible. Borrowers can access funds when needed, making them great for loan building and day to day expenses. Everyone has their time and place – and, when used for the right purposes, can go a long way in building a borrower’s credit and finances.

Note: The information in this article is provided for informational purposes only. Check with your financial advisor about your financial situation.

SOURCE Advance America

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