Credit repayments may be broken down into two primary categories: revolving credit and installment credit. Borrowers can spend the money they borrow, pay it back, and then spend it again with revolving credit. They are given a predetermined credit limit by the lending institution, which may be used in its whole or in parts.

In contrast, borrowers of installment credit loans are responsible for making payments according to a predetermined schedule every month. This particular kind of credit calls for making principal payments that are incrementally less and eventually making the whole amount due, putting an end to the credit cycle. Although secured installment loans are more prevalent, revolving credit and installment credit both occur in secured and unsecured versions. However, secured installment loans are more often seen.

What Is Revolving Credit?

Credit cards and lines of credit are the most prevalent kind of revolving credit. When you charge your revolving credit account, your credit limit will neither increase nor decrease due to these transactions. You can access your account whenever you choose to borrow more money so long as you do not exceed the predetermined limit.

When you create a revolving credit account, you are not borrowing a single quantity of money simultaneously; thus, there is no predetermined payment schedule. You can borrow up to a particular amount, which has been determined for you. However, due to this flexibility, loan amounts are often reduced, and interest rates are typically increased. Borrowers are only responsible for paying interest on the amount that they use of their credit limit.

What Is Installment Credit?

The specified length of time and termination date often referred to as the loan's term, are the characteristics of an installment credit account that stand out the most. The loan agreement will often contain an amortization plan, according to which the principal balance will be progressively lowered throughout several years via installment payments.

Common installment loans include mortgages, car loans, school loans, and personal loans. With each of them, you are aware of the total amount of your monthly payment and the number of months you will be required to make payments. To borrow extra money, you must submit an additional credit application.

Pros of Installment Credit

Predictable payments

The primary advantage of this strategy is the modification in one's expectations about the amount of monthly debt payback that results from utilizing installment credit to pay down revolving debt. When it comes to credit cards and other forms of revolving debt, you must make at least the minimum payment on the sum owed. Because of this, it may become necessary to make many payments, the quantities of which may vary widely, making it challenging to construct a budget.

It is much simpler to create a budget using installment credit since you are given a certain amount to pay back each month for a predetermined time. Installment loans may extend like a mortgage paid off over 30 years. This could result in reduced monthly payments, which are more in line with your monthly cash flow requirements.

Lower borrowing costs

Regarding interest rates, installment credit is more cost-effective for suitable borrowers than revolving credit. When balances on credit cards are carried from month to month without being paid in full, interest rates charged by credit card issuers accumulate. When the interest rate is greater, the cost of maintaining revolving debt for longer might increase.

In general, lenders that provide installment credit will provide borrowers with cheaper interest rates if the borrower has strong credit. Some consumers even take installment loans to pay off their existing balances on revolving credit. This tactic has both benefits and drawbacks depending on how you use it. Additionally, revolving debt might come with excessive costs for late payments or for breaching credit limit thresholds.

Disadvantages of Installment Credit

While some advantages to utilizing installment credit to pay off higher-interest, revolving debt, there are also some disadvantages to employing this method. To begin, there are financial institutions that will not let you prepay the rest of the loan. This indicates that you are not permitted to pay more than the minimum payment due each month (or even settle the debt as its whole) without incurring a prepayment penalty. Repaying debt accrued on credit cards normally does not provide this kind of challenge.

Installment credit providers have far more strict conditions, particularly concerning income, other existing debt, and credit history. Most credit card firms have more flexible lending procedures, especially for customers with greater risk levels.