Is A Personal Loan Installment Or Revolving Debt?

In today’s financial market, countless types of loans and credit accounts are available to potential borrowers. But how can you know which option would best suit your needs? Two of the most common types of financing are installment loans and revolving credit accounts. Installment loans include personal loans, auto loans and mortgages. Examples of revolving accounts include lines of credit and credit cards.

Let’s take a closer look at the differences between installment loans and revolving credit accounts and how these different types of debt can affect your credit score.

Installment loans and revolving credit both give you access to borrowed funds, but they do so using different methods. Below is a breakdown of installment loans versus revolving credit, highlighting their key differences.

As you can see from the table, installment loans (sometimes referred to as installment debt or installment credit) give the borrower a lump sum that they’ll repay in consistent monthly installments over a specified period. This type of loan can come with fixed or adjustable rates. Lenders also tend to enforce stricter qualification requirements with installment loans. For example, you might have to make a down payment of a certain amount or have a specific credit score to be approved for a mortgage.

On the other hand, a revolving account (also called revolving debt or revolving credit) works by giving the borrower access to a line of credit they can borrow against. The account may have a specified lifespan or stay open until the borrower closes it.

If you have a low credit score, revolving credit will likely be more accessible than an installment loan. But keep in mind: Most revolving credit accounts use variable interest rates. And, your minimum payment will also depend on how much you’ve borrowed for the month.

Now that we’ve clearly defined installment and revolving debt, you might be wondering which category a personal loan fits into. Since personal loans are repaid in fixed monthly payments over a repayment term, they’re considered installment debt.

Many borrowers choose this type of financing over revolving credit because of the lower interest rates and fixed payment schedule. These features can make a personal loan easier to pay off and more affordable in the long run.

If you’re still not sure which type of credit is best for you, comparing the pros and cons of each option can make the choice easier.

Pros

Using an installment loan comes with the following advantages:

• Fixed monthly payments are easier to add to a budget than fluctuating payments.
• Lower interest rates could make this option less expensive than revolving credit.
• Funds are delivered in a single lump sum rather than being borrowed in smaller increments.

Cons

Unfortunately, you may experience these disadvantages, as well:

• Getting an installment loan may require you to pay origination fees and closing costs.
• Lenders may enforce stricter credit score and income requirements for installment loans.
• You can’t borrow more money than your loan amount is for unless you apply for additional financing.

Like installment loans, revolving credit also has benefits and drawbacks.

Pros

Revolving credit accounts can be beneficial for the following reasons:

• You don’t have to use the entire credit line and can just borrow the amount you need.
• The money is available whenever you need it once your account is open.
• The more relaxed qualification requirements can make getting approved for this type of credit easier.

Cons

You should also consider the following challenges before applying for revolving credit:

• Minimum payments change depending on how much you’ve borrowed for the month.
• The variable interest rate could fluctuate depending on market conditions.
• Your service provider may implement late fees or different annual percentage rates (APRs) based on the transactions you make.

Both installment and revolving debt can affect your credit score and credit history, but the impact of either one will depend on how you manage the factors we’ll discuss next.

Payment History

If you make regular on-time payments to your credit card company or lender, your FICO® Score could increase. That’s because your payment history makes up 35% of your score. However, this also means if you miss a payment on an installment loan or revolving debt, your credit score could decrease.

Credit Utilization

Unlike personal loans, credit cards can affect your credit score – sometimes called your FICO® Score – through what’s known as your credit utilization ratio, which accounts for 30% of your score. This ratio is a comparison of how much credit you’re using versus how much you could borrow.

For example, if you owe $500 on your credit card but have a $1,000 credit limit, your ratio would be 50%. Most financial experts recommend keeping your ratio below 30%.

Credit Mix

Another 10% of your credit score is determined by your credit mix, which refers to the type of credit accounts you have on your credit report. If you only have installment debt on your report, you could improve your credit score by getting a revolving account, and vice versa. The more diverse your credit mix, the more your credit score could increase.

You can learn more about installment loans and revolving credit accounts with the following frequently asked questions.

When should I use an installment loan?

Installment loans are best for situations where you know the exact amount of money you’ll need. This can include consolidating debt, paying off medical bills or making a large purchase. For instance, if you want to buy a car for $5,000, a personal loan or auto loan would probably be a good choice since you already know the cost of the vehicle. 

When should I use a revolving account?

Revolving credit is usually best for scenarios in which you’re unsure of exactly how much money you’ll need. Let’s say you’re preparing to renovate your house and have a base estimate of $10,000 but you think it could cost more. A home equity line of credit (HELOC) or personal line of credit would probably work better than an installment loan because you could end up needing less money or more, depending on your project and the types of project-related expenses that may or may not pop up. 

Are personal loans considered installment or revolving debt?

Personal loans are a type of installment loan. So are car loans, mortgages, home equity loans and student loans. Revolving credit includes credit cards, personal lines of credit and HELOCs.

Understanding what an installment loan is versus a revolving credit account can help you pick the best option for your situation. And by weighing the pros and cons of each, you can be a more informed borrower.

If you’ve decided a personal loan is the best option for you, get started today with Rocket Loans^SM.