In this era of inflation, it can be difficult to meet basic needs and wants. In such circumstances, borrowing money or obtaining loans can be a helpful solution. There are two main types of credit available, revolving credit and installment credit. This article focuses on the types and differences between personal loans with monthly payments and revolving credit to help you better understand such financing methods.
What Do You Mean By Revolving Credit?
With revolving credit, you can borrow money up to a predetermined limit and then pay it back, repeating this process as needed. This type of credit allows for flexibility in borrowing and repaying. It is often associated with credit cards but can also include home equity lines of credit (HELOCs). With a revolving credit account, you can borrow money per your credit limit, pay the debt in full, or make minimum payments. The interest rate on a revolving credit account is usually variable and can fluctuate based on market conditions.
How Does Revolving Credit Impact Your Credit Score?
Revolving credit can positively or negatively impact your credit score. Some ways are mentioned below:
1. Credit Utilization
It refers to the amount of credit you use compared to your credit limit. Keeping your credit utilization below 30% is usually advisable to maintain a healthy credit score.
2. Payment History
Payment history is one of the essential factors that have an impact on your credit score. If you consistently make timely payments, it can boost your credit score. Late or missed payments, on the other hand, can harm your credit score.
3. Credit Mix
Your credit mix, or the different types of credit accounts you have, can also impact your credit score. A combination of different credit types, such as a credit card and a mortgage, can benefit your credit score.
What Are The Pros And Cons Of Revolving Credit?
There are numerous advantages and disadvantages of Revolving Credit. Some of them are given below:
Pros of Revolving Credit
- Revolving credits are flexible.
- It is a convenient form of credit as you won’t have to apply once again if you have available credit.
- Some forms of revolving credit offer rewards or cashback for using them, which can be a nice perk.
Cons of Revolving Credit
- The interest could be comparatively higher.
- It can be tempting to overspend when using a credit card or other revolving credit account because you can wait to pay for purchases.
What Do You Mean By Installment Loan?
An installment loan is a repayment of the loan amount over a set period. The loan terms, including the repayment period, interest rate, and monthly payments, are agreed upon by the borrower and lender when the loan is issued.
There are many installment loans, including mortgages, car loans, student loans, etc. With an installment loan, the borrower receives the total amount of the loan upfront and then repays it in equal monthly payments until the loan is paid off. The monthly payments generally include both principal and interest.
How Does An Installment Loan Impacts Your Credit Score?
An installment loan can positively impact your credit score if you make your monthly payments on time and in full. Payment history is an essential factor in your credit score. So consistent and timely payment of installments matter. Additionally, having an installment loan and a combination of different credit types, such as a car loan, a mortgage, and a credit card, can benefit your credit score.
On the other hand, missing payments or defaulting on an installment loan can harm your credit score. Late or missed payments can be reported to the credit bureaus and damage your credit score.
What Are The Pros And Cons Of Installment Loan?
There are several advantages and disadvantages of installment loans. Some of them are as follows:
Pros of Installment Loan
- It has a fixed repayment schedule.
- It has a predictable interest.
- Consistently making timely payments on an installment loan positively impacts your credit score.
Cons of Installment Loans
- Your credit score may suffer if you accidentally skip or make a late payment.
- You can borrow more money with installment credit loans than you need. That can result in extra, pointless fees.
Difference between Installment Loan And Revolving Credit
There are several key differences between an installment loan and revolving credit:
|Basis||Installment Loan||Revolving Credit|
|Repayment||The repayment of the installment loan is fixed until it is paid off.||The revolving credit is repaid as per the borrowed amount.|
|Credit Limit||Fixed loan amount upfront.||You can borrow depending on your credit limit.|
|Credit Score Impact||It can positively impact if payments are made on time.||It can have both positive and negative impacts.|
Overall, it’s essential to understand the differences between these two types of credit and how they can affect your financial situation before deciding which one to use.