Installment Loans vs Revolving Credit –– What's the Difference?

At any stage of your life, you may have to borrow money for a wide range of expenses, like planning a wedding, buying a car or responding to an emergency. While lenders offer many ways to borrow funds, most loans fall into one of two categories: installment credit and revolving credit.

Each type of credit has distinct advantages and drawbacks. Understanding the qualities that set installment loans and revolving credit apart can help you choose the right financial tool for your situation.

What’s installment credit?

Installment credit is also known as an installment loan, and the terms are often interchangeable. An installment loan allows you to borrow a specific amount of money all at once. These loans are typically amortized , meaning your payments are equally spread out over a set period called the loan term, and include both principal and interest.¹

When you take out a loan, the amount you borrow is called the principal. Interest is the cost of borrowing that money.

For example, let’s say you take out a $6,000 loan from a bank with a 5-year term and an 8% interest rate. Your monthly payment would be about $121. Part of that payment goes toward reducing the principal (the original $6,000 you borrowed), and part goes toward paying the interest.

Over five years, you’d repay the full $6,000 principal plus approximately $1,260 in interest. That means the total amount you pay back to the lender would be around $7,260.

Common forms of installment credit include personal loans, auto loans, and mortgages. These loans usually come with set terms, meaning they have a fixed interest rate, a regular payment amount, and a clear payoff date by which the loan is scheduled to be fully repaid.

What’s revolving credit?

Revolving credit allows you to continuously borrow money as needed, up to a limit the lender sets for you.

When you open a revolving account, you gain access to an open line of credit rather than a lump sum upfront. You can then continue to draw from that line of credit, up to your set limit.

As you use revolving credit, like a credit card or line of credit, your available credit goes down with each purchase. Making payments, whether partial or in full, restores some of that credit. Paying your full balance by the end of the billing cycle resets your credit limit entirely and helps you avoid interest. But if you carry a balance into the next month, interest starts to build, and your available credit stays lower until more of the debt is paid off.²

Credit cards and lines of credit are the most common types of revolving credit. These accounts can accrue interest on unpaid balances unless you're using a promotional or 0% introductory APR offer.

For example, you might use a credit card with a $2,000 limit to buy $250 in groceries. Your available credit would drop to $1,750 until you repay the $250. If you pay the full balance by the due date, often within the grace period, you won’t be charged interest, and your available credit returns to $2,000. However, if you only make a partial payment, interest will accrue on the remaining balance.

---

---

Installment credit vs. revolving credit — what’s better for you?

Installment loans and revolving credit accounts may each come in handy in different situations.

An installment loan might be a good fit if you’re making a specific larger purchase, like a boat, and have a clear idea of how much money you’ll need. It can also be a helpful option if you’re looking to consolidate debt since the fixed monthly payments and clear payoff date make it easier to manage your budget and stay on track as you pay down what you owe.

Revolving credit, on the other hand, offers flexible access to funds, making it useful for everyday expenses like gas, groceries or travel –– as well as unexpected costs, such as a steep veterinary bill. Many people use credit cards for regular purchases, not only for convenience, but also to build credit history and earn rewards. Just be sure to make at least the minimum payment on time each month to keep your credit score in good shape. Missing payments can cause debt to build quickly and hurt your credit score.

If you’re concerned about overspending or prefer a more structured repayment plan, an installment loan may be a better option. If an installment loan sounds like the right fit for your needs, OneMain Financial can help. Check out our personal loan options to see how you can get the money you need to cover life’s expenses.

Choose what works for your budget

Whatever your financial goals are, understanding your credit and loan options can help you make smart choices and stay in control of your money. The right solution is the one that fits your lifestyle, budget and long-term plans.

Sources:

1. https://www.consumerfinance.gov/ask-cfpb/what-is-a-personal-installment-loan-en-2114/
2. https://mycreditunion.gov/manage-your-money/credit

This article was updated since its original posting in 2022. Kia Jackson and Kim Gallagher contributed to this post.