When you need to borrow money, you’ll come across two main types of credit: installment and revolving. Understanding the difference between these borrowing options can help you make better financial choices.
Installment credit involves borrowing a set amount you’ll pay back in fixed amounts over time. On the other hand, revolving credit gives you a credit limit you can use, pay off, and use again.
In this guide, we’ll explain what installment vs. revolving credit means for your wallet. We’ll also go over when to use each type and how to decide which fits your needs better.
- What is installment credit?
- What is revolving credit?
- Is installment credit or revolving credit right for you?
- Installment vs. revolving credit FAQs
- Navigating your loan and credit options
What is installment credit?
The installment credit definition is straightforward: it’s when you borrow money in one lump sum and pay it back through a series of scheduled payments. These payments typically happen monthly and stay the same amount each time. This makes it easy to create a financial budget.
Examples of installment credit
Here are some installment credit examples:
- Mortgage loans: These are probably the largest installment loans most people will ever take. They help you buy a home by spreading payments over 15 to 30 years.
- Auto loans: When you need a car but don’t have all the cash upfront, an auto loan lets you drive away today and pay over time.
- Personal loans: Personal loans can be used for almost anything. For example, home repairs and medical bills. Installment loans like these typically last one to five years.
- Student loans: These help cover education costs and usually don’t require payment until after graduation. Repayment terms can stretch 10 to 25 years or more.
Pros and cons of installment credit
Installment credit has several benefits and drawbacks to consider. The pros include:
- Predictable payments: You know exactly what you’ll pay monthly, making budgeting easier.
- Fixed end date: There’s a clear finish line telling you when your debt will be paid off.
- Larger amounts: Installment loans help fund large one-time purchases because all funds are available at once.
- Potentially lower interest rate: Installment loans may offer lower rates than revolving credit options.
Keep in mind that no single credit or loan option is right for everyone. It’s important to consider the potential disadvantages before applying for installment credit. These include:
- Less flexibility: Once your loan terms are set, it’s harder to change them if your situation changes.
- Upfront fees: Installment loans may come with an origination fee. This is money you must pay to receive the loan amount.
- Late payment penalties: If you don’t make your monthly loan payment on time, you may have to pay late fees.
What is revolving credit?
Revolving credit allows you to borrow a certain amount of money each month – this is called your credit limit. Every time you buy something, your available amount of credit goes down. Whenever you pay off part or all of your credit balance, your available amount of credit goes up. It’s up to you how much of your credit limit you decide to use.
Unlike installment credit, revolving credit doesn’t provide you with a sum of money. Instead, you can borrow varying amounts of money each month if you choose to. For instance, if you have a credit card with a credit limit of $1,000, it’s up to you whether you would like to borrow $100, $900, or $0.
Examples of revolving credit
Here are some common revolving credit examples:
- Credit cards: These plastic or digital cards let you make purchases up to a dedicated credit limit.
- Home equity lines of credit (HELOCs): These let homeowners borrow against their home’s value up to a set amount. This is similar to a credit card but with lower interest rates.
- Store credit cards: These work like regular credit cards but can only be used at specific retailers. They often have special rewards or discounts.
- Personal lines of credit: These are offered by banks and credit unions, giving you access to funds when needed. They sometimes have lower interest rates than credit cards.
Pros and cons of revolving credit
Like installment credit, revolving credit comes with its own set of considerations. The benefits include:
- Flexibility: You only borrow what you need when you need it.
- Reusable: As you pay down your balance, that credit becomes available again without reapplying.
- Convenience: Having credit ready to use can help with unexpected expenses.
- Rewards potential: Many credit cards offer cash back, points, or other perks for using them.
The potential downsides of using revolving credit are:
- Higher interest: Revolving credit accounts may have a higher interest rate than installment loans.
- Variable payments: Your monthly payment amount changes based on how much you’ve borrowed.
- The temptation to overspend: Having access to credit can make it easier to spend more than you planned.
- Ongoing debt: Without discipline, revolving credit can lead to long-term debt with no end date.
- Late fees: If you fail to make payments on time, you’ll be penalized.
Is installment credit or revolving credit right for you?
Choosing between installment loans vs. revolving credit depends on your needs, spending habits, and financial goals. Both can be valuable when used wisely, and many benefit from access to both types of credit.
Take a look at our chart below to help you understand the key differences between installment and revolving credit:
| Installment credit | Revolving credit |
| Allows you to borrow money in a single lump sum | Allows you to borrow different quantities of money every month |
| Money is typically used to fund a specific purchase | Frequently has a higher rate of interest |
| Loan has a fixed payment size, rate of interest, and duration of payments | Payment size and interest due vary each month based on how much money has been borrowed |
| Loan has finite start and end date | Loan is open-ended |
Installment vs. revolving credit FAQs
Is a credit card installment or revolving credit?
A credit card is a type of revolving credit. With a credit card, you have a maximum amount of money you can borrow and pay back on an open-ended basis.
Are auto loans installment or revolving credit?
Auto loans are a type of installment loan. This loan option can provide you with a lump of money to cover some or all of a vehicle purchase. Then, you can pay that money back slowly over months or years.
Is a student loan installment or revolving credit?
A student loan is an installment loan. With this type of loan, you apply for a specific loan amount, receive that money all at once, and then make regular payments to pay that sum back over many months or years.
Navigating your loan and credit options
Understanding the difference between revolving vs. installment credit is an important part of making smart money choices. Each option has its place in your financial toolbox — installment loans provide structure for large purchases while revolving credit offers flexibility for everyday needs and unexpected expenses.
Remember that building a good credit history with either type requires making timely payments. A personal loan might be the right choice if you’re looking to build credit or need money for a specific purpose. Sun Loan offers installment loans with clear terms and manageable payments to help you meet your financial needs. Apply now.
