What’s The Difference Between Installment And Revolving Credit?

Essentially, there are two types of credit repayments: installment credit and revolving credit. 

In a nutshell, installment credit repayment compels borrowers to pay under periodic or scheduled payments. This type of payment option helps in the gradual decrease of the principal loan amount that would lead to full payment, effectively closing the credit cycle. 

Meanwhile, revolving credit enables people to utilize a line of credit based on the stipulations set on a contract. Of course, this repayment option doesn’t enforce fixed payments, which is beneficial for some people. 

Also, installment and revolving credit are available in either unsecured or secured forms. As of now, it is recommended that you check secured installment options.

Keep in mind that you can only opt for one loan repayment option. If you go for installment credit, you will not be able to avail of revolving credit. The same thing is the opposite. 

Installment Credit

Installment credit is a type of credit that allows you to pay for purchases over multiple payments. These payments are generally made over the course of a year or more. It can be used to purchase anything from furniture to cars, but most installment cards are used to buy things like big-ticket items and home improvements.

The main thing installment credit has in common with other forms of credit is that it allows you to make purchases you might otherwise be unable to afford. Many credit card issuers offer installment loans, direct lenders also offer them, and even some banks may provide installment loans, too.

There are two key characteristics that an installment credit has: the end date of the loan and the predetermined duration of the payment. Usually, the loan comes with an amortization schedule, which directs that the principal amount of the loan is gradually reduced every time you make installments. 

Revolving Credit

Revolving credit is a type of loan in which you borrow and repay a fixed amount of money over a period of time. It’s often called a “revolving” or “revolver” loan because you can borrow the money, repay it, and then borrow it again. You make interest-only payments for a set period of time. Then, for the rest of the loan, you make equal payments of both interest and principal. At the end of the loan, you pay off the loan in full.

Lines of credits and credit cards are two common types of revolving credit. The credit limit of a person doesn’t change every time he or she pays for the revolving credit. You are also free to go back to your account to borrow money again as many times that you want. The only rule is that you should not exceed the borrowing credit limit of your account. 

Since you are not borrowing lump sum money in your account, there’s no fixed payment plan with revolving credits. You just have the opportunity to borrow a certain amount of money. But because of this setup, revolving credit usually results in borrowing small amounts but acquiring high-interest rates. The current interest rate of revolving credit ranges from 15% to 20%. Moreover, the interests are not usually locked in. Hence, your creditors have the power to scale up your interest rates if you make penalties if you don’t pay properly. 

It is notable that revolving credit is riskier than installment credits. Always remember that a significant part of your credit score is determined by your credit utilization rate. The utilization rate is the percentage of your total credit line that you’ve used. So if you’ve got a credit line of $10,000 and you’ve charged $3,000, your utilization rate would be 30 percent.

 

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