When you take out an installment loan, you get the entire amount you’re borrowing in one lump sum when you close on the loan. If you decide you need to borrow more money, you’d be out of luck — even if you paid off almost your entire $10,000 balance. You would need to apply for a new loan to borrow more.
With revolving debt, you get to choose when you borrow funds. You could borrow right after opening a credit card, wait six months, or wait years to borrow, depending on what you want (although if you don’t use your card for too long it could be closed due to inactivity). As long as you haven’t used your full line of credit, you also have the option to borrow again and again, especially as you pay down what you’ve already borrowed.
Installment loans tend to be best when you want to borrow to cover a fixed cost, such as that of a car or another big purchase. If you know you’ll need to borrow but it’s hard to predict when you’ll need the money or how much you’ll need, then revolving debt may make more sense.
Installment loans come with a predictable repayment schedule. You agree up front with your lender on how often you’ll pay, and how much you will pay. If you have a fixed-rate loan, your payment never changes. So if you borrowed money on a five-year term and your monthly payments started out at $150 per month, five years from now, they’d still be $150 per month.
Revolving debt payments depend on how much you’ve borrowed https://www.paydayloansohio.net/cities/gambier/. If you haven’t drawn from your line of credit, you won’t pay anything. Usually, when you’ve borrowed, you pay your revolving debt on a monthly basis. But, you may pay only a small portion of what is due. When you have a credit card, for example, your minimum payment may be either 2% of your balance or $10, whichever is lower.
If you took out a $10,000 personal loan, you’d have $10,000 deposited into your bank account, or would get a $10,000 check
If you make minimum payments only on revolving debt, it can take a long time to pay back what you owe, and you’ll pay a ton of interest during the time the debt is outstanding.
Now you know the difference between revolving debt and installment loans
- How borrowing works: With installment loans, you’re approved to borrow a fixed amount and can’t access more money unless you apply for a new loan. With revolving debt, you’re given a maximum credit limit and can borrow as much or as little as you want. You can also borrow more as you repay what you’ve already borrowed.
- When you access funds: If you take out an installment loan, you get the full amount you’ve borrowed up front. With revolving debt, you haven’t actually borrowed anything when you’re given a credit line. You can borrow anytime you want as long as the credit line remains active.
- How repayment works: Installment loans have a set repayment schedule and a definite payoff date. Your monthly payments are calculated so you pay off the loan by the designated date. With revolving credit, you can make minimum payments as you borrow. And, because you can borrow more as you pay back what you already owed, there may not be any definite date as to when you’ll be free of the debt.
You’ll need to decide which type of financing is right for your particular situation so that you can get a loan or line of credit that makes sense for you.