Is a Personal Loan an Installment Loan or Revolving Credit?

Individuals often encounter various credit products, leading to confusion about their classifications. A common question arises when considering personal loans from banks: are they installment loans or revolving credit? Understanding the distinctions between these credit types is important for informed financial decisions.

Understanding Installment Loans

An installment loan is a type of closed-end credit where a borrower receives a fixed amount of money upfront. These loans have a predetermined repayment schedule, typically involving fixed monthly payments over a set period. Each payment includes both principal and accrued interest. Once repaid, the account closes, and the credit is no longer available without a new application.

Common examples of installment loans include mortgages, used for purchasing real estate, which involve regular payments over many years. Auto loans finance vehicle purchases with fixed payments over a set term. Student loans also require consistent payments over a defined period. This predictable payment schedule can simplify personal budgeting.

Understanding Revolving Credit

In contrast to installment loans, revolving credit provides access to a credit limit that can be used repeatedly. This open-ended credit remains active as long as it is in good standing. Borrowers can draw funds, repay them, and then borrow again up to their established credit limit without reapplying for each new use.

Revolving credit offers flexibility in payment amounts, though a minimum payment is required each billing cycle. Interest is charged on any outstanding balance carried over from month to month. Credit cards are the most recognized form, allowing consumers to make purchases, pay down the balance, and reuse available credit. Home equity lines of credit (HELOCs) and personal lines of credit also exemplify revolving credit, providing ongoing access to funds against a set limit.

Personal Loans from Banks: The Classification

Personal loans obtained from banks are classified as installment loans. This classification aligns with installment credit characteristics. When approved, the borrower receives the entire loan amount as a single lump sum. This fixed sum distinguishes it from the flexible, reusable nature of revolving credit.

Personal loans come with a predetermined repayment schedule, dictating fixed monthly payments that include both principal and interest. These payments are spread over a specific loan term, ranging from a few months to several years. A defined end date for repayment, after which the account closes, further solidifies its identity as an installment loan. This structure provides borrowers with a clear understanding of their financial obligation and a predictable path to debt repayment.