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

When you borrow money, it generally falls into one of two categories: installment loans or revolving credit. The difference comes down to how you access the money and how you pay it back.

An installment loan gives you a fixed lump sum upfront that you repay in equal, scheduled payments over a set term. Tthink auto loans, mortgages and personal loans. Revolving credit, like a credit card or line of credit, gives you a set limit you can borrow against, repay and borrow from again, with payments that change based on your balance. Understanding how each works, and how each affects your credit can help you choose the right option for what you need and avoid paying more than necessary.

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Key Takeaways

• Installment loans give you fixed monthly payments over a set period for things like mortgages, auto loans, student loans and personal loans. Making on-time payments helps build credit but missed payments can drag your score down.

• Revolving credit works differently through credit cards, personal lines of credit and home equity lines of credit (HELOCs) that let you borrow, repay and reuse funds.

• Pay down revolving debt first since it typically carries higher interest and has a bigger impact on your score. Mixing both types responsibly strengthens your credit profile over time.

Summary generated by AI, verified by MoneyLion editors

What Is an Installment Loan?

An installment loan, sometimes called a personal installment loan, is a type of credit where you borrow a set amount of money upfront and repay it in fixed payments over an agreed period. Each payment covers part of the balance plus interest, and the loan ends once you've paid it off.

Common examples include mortgages, auto loans, student loans and personal loans. Installment loans can be secured or unsecured. Secured loans, like auto loans and mortgages, are backed by collateral and usually come with lower interest rates. Unsecured loans, like most personal loans, aren't backed by an asset.

The main appeal is predictability. Your payment stays the same each month, so it's easy to budget for.

If you're looking for finance mostly day-to-day expenses, you may want to compare a personal loan vs. credit card.

What Is Revolving Credit?

Revolving credit lets you borrow money repeatedly, up to a set credit limit. You can use as much or as little as you need, pay it back and borrow again. There's no fixed repayment schedule, you just need to make at least the minimum payment and cover any interest owed.

The most common example is a credit card. A home equity line of credit (HELOC) is another. Revolving credit is flexible because the amount you borrow can change from month to month based on your needs.

That flexibility comes with a tradeoff. Revolving accounts, especially credit cards, often carry higher interest rates than installment loans and it's easier to carry a balance and rack up debt if you're not careful. If you're unsure which is the right fit, you might want to compare a line of credit vs. loan.

The Main Differences Between Installment Loans vs. Revolving Credit

Here's how the two stack up side by side.

• How you borrow: An installment loan gives you a one-time lump sum. Revolving credit gives you ongoing access up to a limit.

• Repayment: Installment loans have fixed payments over a set term. Revolving credit has flexible payments with no set end date.

• Payment amount: Installment payments stay the same each month. Revolving payments change based on your balance.

• Interest rates: Installment loans, especially secured ones, tend to have lower rates. Revolving credit often costs more.

• Best for: Installment loans suit large, planned purchases. Revolving credit suits everyday and variable spending.

Pros and Cons of Installment Loans

Find out what the perks and downsides are to taking out an installment loan. 

Pros

• Lower interest rates, if you have good credit

• Fixed monthly payments you can plan for

• Good for large, upfront expenses

Cons

• Higher rates if your credit isn't strong

• Possible fees, especially for late payments

• Can be risky if the payment doesn't fit your budget

Pros and Cons of Revolving Credit

Revolving credit can substantially impact your credit score, both positively and negatively. Find out which characteristics of revolving credit affects your score. 

Pros

• Flexible access to funds whenever you need it

• Can offer perks like purchase protection (on some cards)

• Useful for short-term or emergency expenses

Cons

• High interest rates if you carry a balance

• Easy to overspend and build debt

• Late or missed payments can hurt your credit score

How Do These Types of Credit Affect Your Credit Score?

These are two of the most impactful credit categories on your credit report. Additionally, these types of credit are the most common way consumers use credit. Learn how each of these categories affects your score. 

Installment Loans

Installment loans can help your credit score in various ways. Adding on-time payments can improve your current credit score. Additionally, this adds to your credit mix which can also help your score. 

However, getting an installment loan doesn't guarantee there'll be a positive or immediate impact on your credit score. You're still responsible for managing the account and making on-time consistent payments. Otherwise, late or missed payments can result in a negative impact on your credit score.

In summary:

• Keep on-time with your payments

• Try not to close your account to quickly after paying off the loan

Revolving Credit

Similar to installment loans, revolving credit can help or hurt your credit score depending on your account management. It has the same benefits for your credit score by adding to your payment history and your credit mix.

Credit utilization is a large part of revolving credit. Credit bureaus consider this heavily when calculating your credit score. Your credit utilization rate is the amount of revolving credit you used divided by the credit available. 

It's best to keep your credit utilization rate under 30% because otherwise, it can hurt your credit score. If you can keep your credit utilization rate under 30% and stay on top of your payments, your credit score should improve over time. 

In summary:

• Maintain a low balance

• Pay off your balance in full whenever possible

Which Debt Should You Pay Down First?

Even though both of these credits have an impact on your credit score, it's best to pay off your revolving credit debt first. This is because revolving credit has a substantial impact on your score due to the fact that it includes credit utilization and payment behavior.

Additionally, revolving credit tends to have higher interest rates which can cause the debt to increase at a drastic rate.

Why Diversifying Your Credit Can Help Your Score

The key difference between these two types of credit is what products they offer, whether that be personal loans or credit card accounts. Overall, both of these credit categories have a considerable amount of impact on your credit score. As such, they should be handled wisely.

FAQs

What's the difference between installment and revolving credit?

Installment credit is considered personal loans, mortgages and car loans whereas revolving credit covers credit cards and personal lines of credit.

What are revolving and installment loans?

Revolving credit and installment loans are umbrella terms for products of credit. Both of these categories have a substantial impact on your credit score.

What are the two basic types of credit?

Installment loans and revolving credit are two most commonly used types of credit.

Key Terms

• Installment loan: A loan that gives you a lump sum upfront and you repay it in fixed monthly payments over a set term.

• Revolving credit: A credit line you can borrow from up to a set limit, repay and use again as you pay down the balance.

• Credit utilization: The amount of revolving credit you're using compared with your total credit limit. Lower utilization can help your credit score.

• Credit mix: The variety of credit accounts on your credit report, such as credit cards and loans. A healthy mix can support your credit score.

Summary generated by AI, verified by MoneyLion editors

Sources

• Consumer Financial Protection Bureau: What is a personal installment loan?

• Consumer Financial Protection Bureau: What is a Personal Line of Credit?