Are Personal Loans Installment or Revolving?
Posted: January 3, 2023 in Credit
Personal loans are one of the few types of credit that can be used for various purposes. Whether it’s a loan for paying off high-interest credit card debt, a big unexpected expense, or something fun, it’s important to understand how you’re borrowing funds - as an installment or a revolving loan. Let’s dive into the difference between installment and revolving personal loans. Keep in mind that both types of loans can affect your credit score but work differently.
Installment vs. Revolving
Installment loans require the borrower to pay the amount borrowed in installments - daily, weekly, or monthly. The lender will expect you to make consistent periodic payments based on your principal balance and loan interest rate. Eventually, you’ll pay the total debt by the end of the term or earlier. Common installment loans include car loans, home equity loans, student loans, and mortgages.
Revolving loans allow the borrower to hold a revolving line of credit, meaning the loan amount continually renews after the debt is paid off. The most common type of revolving loan is a credit card. It’s important to understand that you may accrue interest if you carry your revolving loan past the expected due date. For example, if you missed your loan payment for one month, the loan balance will carry over to the next month plus interest. Also, you can continue to borrow as long as you don’t exceed the credit limit. Other revolving loans include home equity lines of credit, personal lines of credit, and business lines of credit.
Revolving Loan and Your Credit Score
Both types of loans can impact your credit score positively or negatively.
Credit scoring agencies like TransUnion, Equifax, and Experian consider credit utilization, a measure of how much of your available credit you’re using, a critical factor in determining your credit score. However, credit utilization only applies to revolving accounts, so since most personal loans are installment loans, that wouldn’t factor into your credit utilization. On the flip side, you can use a personal loan to repay revolving credit debt, which would positively impact your credit score.
Why Choose Installment vs. Revolving Loan?
Both installment and revolving loans have their perks and pitfalls. Let’s look at how they compare to decide which loan best suits your situation.
Installment loans are repaid in equal monthly payments over a set time. The main advantage is that you know how much you’ll need to pay monthly, so it’s easy to budget for the payments. Some financial institutions may charge you a fee if you want to pay off the loan early, but ProFed does not charge a prepayment penalty on any of our loans.
Revolving loans allow you to borrow money repetitively up to a specific limit, which you can repay at your own pace as long as you meet the minimum amount due each month. The advantage of this loan is that you can choose when and how much to repay each month; however, the downside is that your interest rate and payment amount may change from time to time.
Given these differences, a borrower’s choice is typically whether a project is to be funded in total or via a series of transactions.
Ready to apply for a personal loan? Contact our lending team today, and we can help you get started.
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