An installment loan is a type of funding in which borrowers receive money in one lump sum and repay it according to a predetermined payment schedule. This is different from other credit options, like revolving credit, where lenders grant approved borrowers access to a set credit limit that renews each month.
Understanding the core differences between these financial products and how they can impact your finances will help you decide which option may work best for you!
What are Installment Loans?
Installment loans, also known as installment credit, are a type of loan in which lenders approve borrowers for a set loan amount. Over the course of their loan term (which can range from a few weeks to months or even years), borrowers typically pay off their loan balance (plus interest and fees) with fixed payments.
Common types of installment funding accounts include:
- Personal loans
- Car loans/auto loans
- Mortgages
- Student loans
- Payday loans
Advantages of Installment Loans
Installment accounts are such a popular financial product because they can come with benefits such as:
- Predictable payments: Installment loan accounts that come with fixed interest rates typically result in equal monthly payments. That means borrowers can expect their minimum amount due to be the same each month!
- Lower interest rates: Installment accounts often have lower interest rates than other types of loans, like payday loans or other quick cash loans, even for borrowers with a less-than-perfect credit history or lower credit score.
- Easier budgeting: When your installment loan has fixed interest rates and equal monthly payments, you can easily plan out payments and incorporate your loan repayment into your existing budget management.
Drawbacks of Installment Loans
A couple of drawbacks borrowers may come across with installment credit accounts are:
- Strict repayment terms: Some installment credit accounts come with strict repayment terms and penalize borrowers who deviate from those terms. For example, while most lenders charge late payment fees to borrowers who make late payments, some lenders also charge loan prepayment penalties that penalize borrowers who make early payments on their loans. Thankfully, not all installment credit accounts come with prepayment fees, so if this is something you want to avoid, make sure you find a lender that lets you pay off your loan early.
- Potentially higher costs: While installment loan accounts may have lower interest rates than certain types of cash advance loans, rates may still be higher for borrowers with lower credit scores. If you want to find competitive interest rates on a loan but have a poor credit score, look for lenders who specialize in bad credit loans.
What is Revolving Credit?
Revolving credit accounts are lines of credit that give borrowers access to a set amount of funding on a recurring basis. With a revolving credit account, borrowers can make purchases using their set credit limit, which renews at the end of each month. While there is no set date as to when borrowers must pay off their total balance, it’s best practice to pay off your line of credit as quickly as possible to avoid excessive interest rate charges.
Different types of revolving credit accounts include:
- Secured Credit Cards
- Unsecured Credit Cards
- Home Equity Lines of Credit (HELOC)
- Business Credit Cards
Advantages of Revolving Credit
Revolving credit accounts can come with some great benefits like:
- Repayment flexibility: Borrowers aren’t required to repay their full balance each month; they’re just required to make a minimum monthly payment.
- Convenience: Unlike installment credit, borrowers with a revolving credit line have access to funding every month without having to reapply.
- Credit building: Borrowers who have access to a higher credit limit and a positive payment history have the potential to improve their credit scores over time!
Drawbacks of Revolving Credit
A few drawbacks of revolving credit accounts include:
- Higher interest rates: Credit cards and other types of revolving credit accounts may come with higher interest rates, especially if you have a lower credit score.
- Risk of debt accumulation: Revolving credit accounts can be quite expensive, between interest rates, fees, and other potential charges. Furthermore, borrowers who consistently spend their full credit limit while only making minimum payments are likely to accumulate debt that is extremely difficult to repay.
- Impact on credit score: While credit cards and revolving lines of credit can help improve credit, they can also harm your score if you submit late or missed payments. You may also always see your credit score drop initially after applying for a credit card due to the hard credit report inquiry most lenders require during the approval process.
Key Differences Between Installment Loans and Revolving Credit
Check out some core differences between revolving credit vs. installment credit below:
Repayment Structures
For installment debt, borrowers will repay their balance with monthly payments. Usually, borrowers must adhere to the repayment schedule in their initial loan agreement, although many lenders allow borrowers to pay off their balance early.
For revolving credit accounts, borrowers are only required to submit a minimum payment if they are carrying a credit balance. There’s also no set date as to when borrowers must have their balance repaid. However, as discussed, it’s in the borrower’s best interest to pay off their balance as often as possible.
Interest Rates
Interest rates and APRs play a huge role in determining the total cost of a loan. Usually, loans and lines of credit have either fixed or variable interest rates. With fixed rates, interest charges stay the same throughout the life of the loan. With variable rates, charges may fluctuate and result in varying monthly payments.
With installment loan accounts, lenders charge interest on the entire loan amount, which is factored into the borrower’s repayment schedule. Borrowers using revolving credit, on the other hand, are only charged interest on the funds they actually use, not their entire credit limit.
Before you apply for an installment loan or revolving credit account, think about how the interest rates will affect your ability to repay your balance. Make sure you can afford to repay what you borrow, plus interest, so you don’t end up getting overwhelmed and putting yourself at risk of making late payments or missing them altogether.
Below is a breakdown of some common interest rates that may come with revolving credit vs. installment credit:
| Loan Type | Common Types of Interest Rates | Average APR |
| Revolving Credit | Variable | 10% – 25% |
| Installment Credit | Fixed | 3% – 10% |
| Personal Loans | Fixed/Variable | 6% – 36% |
| Mortgage Loans | Fixed | 2% – 6% |
| Auto Loans | Fixed | 2% – 5% |
| Student Loans | Fixed/Variable | 4% – 12% |
Credit Impact
Both installment credit and revolving credit can affect a consumer’s credit history and credit report. Each of these financial products will affect the borrower’s credit utilization, which is the comparison to how much available credit a consumer has access to compared to how much they are using. Traditionally, financial experts advise consumers to keep their credit utilization at no higher than 30%.
In addition to credit utilization, both installment credit accounts and revolving lines of credit will also affect the following aspects of a consumer’s credit report:
- Payment history: Credit bureaus keep track of how timely consumers are with repaying their debts, which includes installment debt as well as revolving credit debt. In fact, payment history is the most significant factor that affects your credit score!
- Credit mix: When used responsibly, revolving credit and installment credit can both positively impact your credit mix.
How to Choose Between Installment Loans and Revolving Credit
Consider the following when choosing between revolving credit vs. installment credit:
- Financial situation: Take inventory of your current financial situation. If you already have an excessive amount of debt, now may not be the best time to take out another financial product.
- Expenses: Installment credit may work best if you are looking to cover one large expense. However, a credit card or other line of credit may be most helpful if you are looking to pay for recurring expenses.
- Your budget: Most installment accounts come with monthly payments until you repay your balance in full. Revolving credit, on the other hand, only requires a monthly payment when you’re carrying a balance.
Find Your Best Installment Credit Option with CreditNinja
There’s no shortage of options for consumers looking to borrow money. Installment credit may be helpful for consumers looking to pay for one large expense, while revolving credit may work better for people looking to cover small expenses over time.
If you’re looking for a personal installment loan that comes with benefits like flexible terms, competitive interest rates, and helpful customer service, consider CreditNinja online loans. Check out our simple online application to see how much you could get in personal loan funding today!*
