The Difference Between Online Installment Loans and Revolving Credit
Most people who want to borrow money choose between online installment loans and revolving credit. But before you take out either of these loan types, you need to understand the features of the two first. Of course, there are key differences that you have to know between these two types of loans.
Revolving credit enables the borrower to obtain whatever amount of money in a line of credit until the borrower hits the borrowing limit. On the other hand, online installment loans have fixed loan amounts that borrowers repay with scheduled installment payments (read this article about installment loans online at Personal Money Network for a guide).
Now, let’s have a comprehensive breakdown of how a revolving credit and an online installment loan differ.
How Does Borrowing Work on Installment Loans vs. Revolving Credit?
Online Installment Loans
You can obtain online installment loans from online lenders. Auto loans, personal loans, and mortgages are common types of installment loans.
This type of credit can have either a variable interest rate or a fixed interest rate. A variable interest rate means that your interest rate can change throughout the loan based on the financial index. A fixed interest rate, on the other hand, means that your interest rate doesn’t fluctuate throughout the loan’s lifespan.
If you choose a fixed-rate installment loan, you know exactly the total amount of what you owe until the loan duration ends. You can also predict and budget your money every time the scheduled repayment comes.
Credit cards and home equity lines of credits (HELOCs) are typical loans under the revolving credit category. Borrowing a revolving type of credit provides you a maximum borrowing limit, from which you can take as little or as much money as you want.
For example, in a $5,000 HELOC, you can initially borrow only $2,000 from that pool of money. If you pay back the amount you owe (which is $2,000), you can borrow another amount of money in the credit line again.
In a credit card, which is an open-ended revolving debt, your line of credit can remain open indefinitely. It means that you can take out an amount and repay what you owe over and over. There are also some instances where your credit line is only open for a limited time (say, 5 to 10 years).
Choosing a revolving credit can be a risky type of credit if you fail to pay attention to the total cost of what you owe or when you’re paying your debt. Some people keep on borrowing while their credit line is open without knowing that their debt is already growing. Many lenders also charge a variable interest rate for revolving credit.
When Can You Get the Funds on Installment Loans vs. Revolving Credit?
Online Installment Loans
Online lenders will deposit the loan amount in a lump sum to your bank account once your loan application is approved. If you think the amount borrowed is not enough and you want to borrow more cash, you have no choice but to apply for a new loan.
That’s why it’s advisable to know the exact amount you need to avoid applying for a new loan. Online installment loans are a great option if you have to cover a big purchase.
As mentioned earlier, revolving credit gives you access to a credit line until you hit the borrowing limit. You can decide when you should obtain cash and how much money you want as long as you haven’t exhausted your available line of credit.
You can obtain cash from the credit line right after you open a credit card, or wait for several months or years to borrow. However, some forms of revolving credit will close if you don’t use it for a long time.
How Does Repayment Work for Installment Loans vs. Revolving Credit?
Online Installment Loans
The repayment schedule for online installment loans is predictable. You and the lender must reach an agreement on how often you’ll pay for the money you’ll borrow. For a fixed interest rate, the loan payment will remain the same throughout the loan’s lifespan. If you choose a variable interest rate, you must expect that the payment will either decrease or increase.
For revolving credit, your payment will depend on how much money you’ve taken out of the credit line. Of course, you won’t have anything to pay if you haven’t obtained any amount from the line of credit.
When you’ve drawn money from the credit line, you have to repay it per month, depending on the agreement between you and the lending institution or credit card company. You can opt to pay your revolving debt with minimum payments (typically 2 percent of your balance). But it may take a long time before you can repay the amount you borrow plus its interest.
To obtain an online installment loan or a revolving credit, you must first know the key differences between the two. Make sure to review this blog post every time you need a refresher on this subject matter.