Installment Loans vs. Revolving Credit: What's the Difference?

Installment loans and revolving credit are two types of credit that can get you funds to cover expenses. With an Installment Loan, you can borrow a set amount of money upfront and repay it over a certain time period. Revolving credit, however, is when you borrow as much or as little as you’d like up to a set credit limit. Let’s dive deeper into the differences between installment loans and revolving credit.

What is an installment loan?

An Installment Loan is a type of loan where you receive a lump sum of money at once. You can pay back the funds over an agreed upon term via a fixed number of payments, also called installments. Since you have to decide exactly how much you want to borrow, installment credit can make it easier for you to budget and avoid overspending.

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Types of installment credit

There are several types of installment credit, including:

• Mortgages: A mortgage can help you buy a house and pay it back over a term that’s usually around 15 or 30 years.
• Car loans: You’ll likely need to repay your car loan in monthly installments over a period of 12 to 96 months, depending on your lender’s terms.
• Personal loans: You can use a personal loan to cover an emergency expense, consolidate debt, or anything else you’d like. Personal loan terms are typically between 12 and 96 months.

What is revolving credit?

Revolving credit has a set credit limit or maximum amount that you can spend. Once you spend the amount of money you’d like, you may pay off your balance in full at the end of each billing cycle. If you don’t, your balance will carry over to the next cycle and “revolve” the balance.

Types of revolving credit

Some examples of revolving credit include:

• Credit cards: With a credit card, you can borrow money to cover any online or in-person purchase, as long as you don't exceed your credit limit. If you don’t pay your balance in full by its due date, you’ll have to pay interest and may face late fees.
• Personal lines of credit: A personal line of credit can allow you to borrow money any time you’d like up to your set credit limit. You’ll only pay interest on the amount you borrow.
• Home equity lines of credit: If you have equity in your home (the difference between what you owe on your mortgage and what your home is currently worth), a home equity line of credit (HELOC) may be an option. Most lenders will allow you to borrow up to 85% of your available equity.

What are some differences between installment loans and revolving credit?

Installment loans offer a lump sum of money upfront, while revolving credit allows you to borrow as much or as little money as you’d like. To repay an installment loan, you follow a fixed payment plan. Revolving credit, however, is more flexible as there is no set payment plan. You can repay the money you borrow right away or wait to pay it back.

Does an Installment Loan or revolving credit impact my credit score?

Both installment loans and revolving credit can affect your credit score, but revolving credit can have a bigger positive or negative impact depending on how you pay off your balance. If you only borrow a small percentage of your credit limit and pay the bill in full each month, this can improve your credit score. But if you spend the maximum and don’t make payments on time, your score will go down.

The amount of revolving credit you borrow and your payment history plays an important role in your credit score. Installment credit can affect your credit score as well, but it won’t have as much of an impact.