Is a Personal Loan an Installment or Revolving Account?

Personal loans help individuals cover various expenses, manage unexpected costs, or consolidate existing debts. They provide funds for purposes such as home improvements, medical bills, or large purchases. Understanding credit categories like installment or revolving is important for consumers to manage their finances effectively. Each type of credit has distinct characteristics that influence repayment structures and how funds are accessed.

Defining Installment Loans

An installment loan provides a fixed sum of money upfront, repaid through scheduled, consistent payments over a predetermined period. The repayment schedule typically includes fixed monthly payments that cover both a portion of the principal and the interest accrued. The interest rate on an installment loan is often fixed for the entire duration, providing predictability for budgeting. Common examples include mortgages, auto loans, and student loans. Once the final payment is made, the account closes, meaning the borrower cannot access additional funds without applying for a new loan.

Defining Revolving Credit

Revolving credit offers a credit limit that can be used, repaid, and reused repeatedly, and does not have a fixed number of payments, remaining open as long as the account is in good standing. Monthly payments vary based on the outstanding balance, and borrowers can pay the full amount or a minimum, with interest accruing on carried-over balances. Credit cards are the most recognized form, allowing continuous access to funds up to an approved limit. Other examples include home equity lines of credit (HELOCs) and personal lines of credit. Interest is typically calculated on the average daily balance, and available credit replenishes as payments are made.

Categorizing Personal Loans

Personal loans are universally categorized as installment loans, a classification stemming from their structure where a specific amount is borrowed and repaid over a set period with predetermined, regular payments. Borrowers receive the entire loan as a lump sum, establishing a clear repayment schedule. Repayment terms typically range from one to seven years, with consistent monthly payments covering both principal and interest. This predictable payment structure allows borrowers to budget effectively, as the payment amount remains stable. While a personal line of credit functions as a revolving account, a standard personal loan adheres to the fixed terms characteristic of an installment loan.