Did you know that loans and many credit cards represent two different types of credit? A mortgage loan or personal loan are examples of installment credit and many credit cards provide revolving credit. Read on to learn some of the differences between these types of credit, as well as tips about how to decide between them.
Installment credit basics
With installment credit, you borrow a specific amount of money and have a set amount of time to repay the loan, usually several years. The loan can have a fixed rate, which won’t change over the term of your loan, or a variable rate, which may rise or fall during the loan term. Mortgages, car loans, student loans, and personal loans are all examples of installment credit.
Installment loans can either be secured or unsecured. Secured loans are backed by something of value, like a home or car, which the lender can take if you do not pay the loan back. Unsecured loans don’t require you to put any property at risk, but interest rates are often higher since the lender faces more potential risk.
Understanding revolving credit
Revolving credit is open-ended and is not required to be paid off within any specified number of months or years. The lender gives you a credit limit, which is the maximum amount of debt which can be outstanding with that lender at once. The amount you’ll pay each month may change, depending on how much of your available credit you use. As you use the credit, the amount of money available to you decreases. As you repay it, it goes back up. Credit cards and lines of credit are both examples of revolving credit.
Comparing installment and revolving credit
People usually use installment credit to pay for big ticket items like a home, vehicle, or college education and revolving credit for everyday purchases like food, gas, and clothes. The benefits of installment credit can include:
- A lower interest rate
- If the rate is fixed, the same payment each month can make budgeting easier
- A decreasing balance as you make payments
- Interest paid only on the original amount you borrowed
The advantages of revolving credit can include:
- Flexibility to change your monthly payments
- The ability to access your credit as often as you’d like as long as you don’t go over your credit limit
- No application or waiting time to get money once you have the card or line of credit
Keep in mind that some credit cards charge annual fees, as well as fees for going over your credit limit or making a late payment or for certain other features or services. In addition, since there’s no set time for paying off revolving credit, your overall debt could grow as more interest accrues on your outstanding balance.
When deciding on what kind of credit to obtain, look at the advantages and disadvantages for all types and pick the one that matches your particular needs.
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.