Is a personal loan installment debt or revolving debt?

Two of the most common types of financing are installment loans and revolving credit accounts. Installment loans include personal loans, auto loans, and mortgages. Examples of revolving accounts include lines of credit and credit cards.

Personal loans are installment debt because there repaid in fixed monthly payments based on the lender’s repayment terms. Borrowers choose this type of financing over revolving credit because of the lower interest rates and fixed payment schedule. These features can make a personal loan easier to pay off and more affordable overall.

Let’s take a closer look at the differences between installment loans and revolving credit accounts and how these different types of debt can affect your credit score.

At a glance: Installment loans vs. revolving credit

What is an installment loan?

lnstallment loans (sometimes referred to as installment debt or installment credit) give the borrower a lump sum that they’ll repay monthly over a specified period. This type of loan can come with fixed or adjustable rates. Lenders tend to enforce stricter qualification requirements with installment loans. For example, you might have to make a down payment of a certain amount or have a specific credit score to for mortgage approval.

What is a revolving account?

A revolving account (also called revolving debt or revolving credit) works by giving the borrower access to a line of credit they can borrow against. The account may either have a specified lifespan or stay open until the borrower closes it.

If you have a low credit score, revolving credit will be more accessible than an installment loan. But keep in mind: Most revolving credit accounts use variable interest rates. And your minimum payment will also depend on how much you have borrowed for the month.

The pros and cons of installment credit

If you’re still not sure which type of credit is best for you, comparing the pros and cons of each choice can make the choice easier.

Pros

Using an installment loan comes with the following advantages:

• Fixed monthly payments are easier to add to a budget than fluctuating payments.
• Lower interest rates could make this option less expensive than revolving credit.
• Funds delivered in a single lump sum rather than borrowed in smaller increments.

Cons

Unfortunately, you could experience these disadvantages, as well:

• Getting an installment loan may require you to pay origination fees and closing costs.
• Lenders enforce stricter credit score and income requirements for installment loans.
• You cannot borrow more money than your loan amount is for unless you apply for added financing.

The pros and cons of revolving debt

Pros

Revolving credit accounts can be beneficial for these reasons:

• You do not have to use the entire credit line and can just borrow the amount you need.
• The money is available whenever you need it once your account is open.
• The more relaxed qualification requirements can make getting approved for this type of credit easier.

Cons

You should consider the following challenges before applying for revolving credit:

• Minimum payments change depending on how much you have borrowed for the month.
• The variable interest rate could fluctuate depending on market conditions.
• Your service provider will implement late fees or different annual percentage rates (APRs) based on the transactions you make.

How will installment debt or revolving debt affect your credit?

Both installment and revolving debt can affect your credit score and credit history, but the impact of either one will depend on how you manage the following factors:

Payment history

If you make regular on-time payments to your credit card company or lender, your FICO^® Score could increase. Your payment history makes up 35% of your score. However, this means if you miss a payment on an installment loan or revolving debt, your credit score could decrease.

Credit utilization

Unlike personal loans, credit cards can affect your credit score through what’s known as your credit utilization ratio, which accounts for 30% of your score. This ratio is a comparison of the credit you are using versus how much you could borrow.

For example, if you owe $500 on your credit card but have a $1,000 credit limit, your ratio would be 50%. Most financial experts recommend keeping your ratio below 30%.

Credit mix

Another 10% of your credit score is decided by your credit mix, which refers to the type of credit accounts you have on your credit report. If you only have installment debt on your report, you could improve your credit score by getting a revolving account, and vice versa. The more diverse your credit mix, the more your credit score could increase.

Revolving credit vs. installment loans: FAQs

You can learn more about installment loans and revolving credit accounts with the following often asked questions.

When should I use an installment loan?

Installment loans are best for situations where you know the exact amount of money you will need. This can include combining debt, paying off medical bills or making a large purchase. For instance, if you want to buy a car for $5,000, a personal loan or auto loan would probably be a good choice since you already know the cost of the vehicle.

When should I use a revolving account?

Revolving credit is usually best for scenarios in which you are unsure of exactly the amount of money you will need. Let us say you are preparing to renovate your house and have a base estimate of $10,000 but you think it could cost more. A home equity line of credit (HELOC) or personal line of credit would probably work better than an installment loan because you could end up needing less money or more, depending on your project and the types of project-related expenses that could pop up.

Are personal loans considered installment or revolving debt?

Personal loans are a type of installment loan. So are car loans, mortgages, home equity loans and student loans. Revolving credit includes credit cards, personal lines of credit and HELOCs.

The bottom line: Should you pick installment credit or revolving?

Understanding what an installment loan is versus a revolving credit account can help you pick the best choice for your situation. And by weighing the pros and cons of each, you can be a more informed borrower.

If you’ve decided a personal loan is the best option for you, get started today with Rocket Loans^SM.