Is a Personal Loan Installment or Revolving?

When you're exploring options for borrowing money, personal loans stand out as a flexible and convenient solution. However, it's crucial to understand the different types of personal loans, such as installment and revolving loans, to make informed financial decisions.

Understanding revolving credit vs. installment loans

Installment Loans

An installment loan is a loan that provides borrowers with a lump sum of money upfront, which is then paid back in installments over a set period. A personal loan is a type of installment loan.

Installment loans can be further divided into two categories: those with fixed interest rates and those with variable interest rates.

Fixed rate installment loans

As the name suggests, these loans come with a fixed interest rate that remains constant throughout the loan term. This stability ensures consistent interest costs. Fixed rate loans also have fixed payments, the payment amount remains the same throughout the life of your loan, offering predictability with equal monthly payments, making it easier to budget for your loan payments.

Variable rate installment loans

For variable rate loans, on the other hand, the interest rate can vary throughout the life of the loan, usually in line with the market and cash rate. This offers less stability because your repayment amounts can change, but generally they offer a lower interest rate than fixed rate loans initially, plus you can end up with a lower interest rate throughout the loan if interest rates drop. Although, conversely, you could end up paying more if interest rates rise.

Examples of installment loans:

• Personal Loans: Personal loans can cover various expenses, from debt consolidation to unexpected medical bills. They offer flexibility in how you use the funds, making them a versatile borrowing option. Wondering if personal loans are variable rate or fixed rate? They can be both.
• Car Loans: When you finance a car purchase with an auto loan, you often enter into an installment loan agreement. You make regular payments until the loan is fully paid off.
• Mortgages: Home mortgages are typically long-term installment loans with fixed or variable interest rates. Borrowers make monthly payments over many years to own their homes.
• Student Loans: Student loans help finance higher education. They come in both federal and private forms, with varying interest rates. Federal student loans often have fixed interest rates, while private loans may offer fixed or variable rates.

Advantages of Installment Loans

• Lower Interest rates: One of the advantages of installment loans is that they often come with lower interest rates than revolving credit. This means you can potentially save money on interest costs compared to high-interest credit card debt or other forms of borrowing.
• Ease of budgeting: Installment loans provide structured payments, making it easier to budget for your loan payments, especially if you choose a fixed rate installment loan.

Whether you're financing a car, buying a home, covering unexpected expenses, or investing in education, installment loans offer financial support with predictability and generally more favorable interest rates than revolving credit.

Revolving credit

A revolving credit is a flexible credit arrangement that provides borrowers with a predefined credit limit from which they can borrow and repay funds as needed, often with varying interest rates that are higher than installment loan rates.

Unlike installment loans with fixed terms and repayment schedules, revolving credit offer flexibility as borrowers can continually draw funds up to their credit limit and make payments, allowing them to use and repay the credit repeatedly.

Examples of revolving credit:

• Credit Cards: Credit cards are the most common form of revolving credit. With credit cards you are given a credit limit, and you can borrow and repay money within that limit as often as you'd like. This flexibility is ideal for covering daily expenses and managing unexpected costs.
• Revolving Lines of Credit: Revolving lines of credit work similarly to credit cards but is often offered as a standalone product and may offer different terms and interest rates. Like credit cards, you can borrow and repay funds repeatedly, as long as you stay within your predetermined credit limit.
• Home Equity Lines of Credit (HELOCs): A HELOCs allow homeowners to borrow against the equity in their homes. It provides a revolving line of credit that can be tapped into for various purposes, such as home improvements or debt consolidation.

Advantages of revolving credit

• Flexibility: Unlike installment loans that provide a fixed lump sum, revolving credit provides access to a line of credit that you can use as needed. This flexibility is ideal for covering daily expenses, as you can borrow and repay money within your available credit limit multiple times.
• Financial safety net: Revolving credit provides a financial safety net that adapts to your changing financial needs, making it a versatile and convenient borrowing option, ideal for unexpected expenses.

Whether you're financing a car, buying a home, covering unexpected expenses, or investing in education, installment loans offer financial support with predictability and generally more favorable interest rates than revolving credit.

Loan eligibility requirements

So, is it hard to get a personal loan? The requirements for getting a loan or revolving credit vary depending on the lender and the specific loan type. One important factor they will look at, and a good indicator of whether you’ll get approved, is your credit score. In general, the higher your credit score, the higher your chances of getting approved. If you have a better credit score, you may also be offered a better rate and a higher loan amount or credit limit.

Here's a general overview:

• Good to Excellent Credit: For the most favorable terms and interest rates, having good to excellent credit score is advantageous. Lenders typically offer lower interest rates to borrowers with strong credit histories.
• Fair Credit: If you have fair credit score, you may still qualify for a personal loan, but your interest rates could be higher. Lenders may consider other factors, such as your income and employment history, when evaluating your application.
• Poor Credit: If you have poor credit score, you may find it challenging to get an unsecured personal loan. However, you might still have options, such as secured loans that require collateral, like a car or savings account, or obtaining credit through a specialist lender.

It’s worth noting that a personal loan or revolving credit can also impact your credit score both positively and negatively. If you’re wondering how a personal loan affects your credit score, the simple answer is it comes down to how you manage your repayments.

You can learn more about your credit score at these resources:

• S. Federal Trade Commission (FTC) - Credit Scores
• Experian - Credit Education
• Equifax - Credit Education

At MONEYME Finance, we understand that everyone's financial situation is unique. That's why we offer a streamlined process to help you find the right loan offer, even if you have less-than-perfect credit. We take into account various factors to match you with a suitable loan option, making borrowing money more accessible and convenient.