Installment loans and revolving credit are two common borrowing options, each working differently to suit various needs. Knowing their differences can help you make better financial decisions.
What is an Installment Loan
An installment loan is a type of loan where you borrow a fixed amount and repay it over a set number of scheduled payments, or installments. Each payment typically includes both principal and interest, and the terms are agreed upon at the start of the loan. Common examples of installment loans include:
- Auto loans
- Mortgages
- Personal loans
- Student loans
Once you receive the funds, you must pay back the balance in equal monthly payments over a predetermined period (such as 12, 36, or 60 months). When the loan is fully repaid, the account is closed.
Key Features of Installment Loans
- Fixed Amount Borrowed
You receive a lump sum upfront.
- Repayment Schedule
Payments are made in equal installments over a set term.
- Predictable Payments
Monthly payment amounts remain the same, allowing for easier budgeting.
- Interest Rates
Rates may be fixed or variable but are often known upfront.
- Loan Closure
Once the balance is paid off, the loan account is closed.
Advantages of Installment Loans
- Budget Friendly
Knowing exactly how much you owe each month makes financial planning easier.
- Lower Interest (Often)
Installment loans (especially those secured by collateral, like car loans or mortgages) might offer lower interest rates than some revolving credit options.
- Structured Debt Repayment
A clear end date gives borrowers a finish line to work toward.
What is Revolving Credit?
Revolving credit represents a flexible borrowing arrangement where you’re given a maximum credit limit and can borrow, repay, and borrow again as needed. The most common example is a credit card, but personal lines of credit and home equity lines of credit (HELOCs) also fall into this category.
With revolving credit, you pay interest only on the money you’ve actually used, not the full credit limit. Your available credit replenishes as you make payments, allowing for ongoing access.
Key Features of Revolving Credit
- Credit Limit
Lenders set a maximum amount you can borrow at any time.
- Ongoing Access
Repay what you’ve borrowed, and you can use that credit again without reapplying.
- Flexible Payments
You can make minimum payments or pay off your balance in full each month.
- Variable Interest
Interest accumulates only on the amount you carry past the grace period.
Advantages of Revolving Credit
- Flexibility
You can borrow as much (up to your limit) or as little as you need, whenever you want.
- Quick Access
Great for emergency expenses or day-to-day purchases.
- Potential to Build Credit
Responsible use of revolving credit can strengthen your credit score over time.
Key Differences at a Glance
| Feature | Installment Loan | Revolving Credit |
| Borrowed Amount | Fixed lump sum | Up to set credit limit |
| Repayment | Fixed monthly payments | Flexible, minimum or full |
| Account Lifespan | Ends when paid in full | Stays open and reusable |
| Common Examples | Auto loans, mortgages, personal | Credit cards, HELOCs |
| Best For | Large, planned purchases with end | Ongoing, fluctuating needs |
Which Should You Use and When
Understanding when to use an installment loan versus revolving credit depends on your goals and financial situation:
- Installment Loans
Opt for these when you need a specific sum for a one-time expense, like buying a car, funding home improvements, or paying for education. The predictable payments help you manage large purchases without surprises.
- Revolving Credit
These accounts are ideal for everyday spending, short-term cash flow gaps, or unexpected emergencies. They’re also useful for building a strong credit history, provided you pay off your balance consistently and on time.
How Both Types of Credit Affect Your Credit Score
Both installment loans and revolving credit accounts impact your credit score. Having a mix of credit types can actually boost your score by demonstrating to lenders you can manage different borrowing arrangements. However, late payments, very high credit utilization, or missed payments can hurt your score regardless of the account type. For personalized guidance, consider working with a credit union in Utah to better understand how to manage your credit effectively.
Making Smart Borrowing Decisions
Choosing between installment loans and revolving credit is less about which is better generally, and more about what’s best for your unique needs:
- For stability and budget-friendly payments, installment loans are hard to beat.
- For ongoing convenience and flexibility, revolving credit offers perks that fit modern life.
Before applying for any new loan or line of credit, carefully review interest rates, fees, repayment terms, and your current financial situation. If managed wisely, both can serve as valuable tools in your financial toolkit.
Conclusion
The right borrowing strategy makes all the difference. By understanding the strengths and weaknesses of installment loans vs revolving credit, you can borrow with confidence, avoid costly pitfalls, and build a stronger financial future.
