Is a Personal Loan From the Bank Installment or Revolving?
Clarify the structure of personal bank loans. Discover if they are an installment or revolving credit type and how they operate.
A personal loan from a bank represents an unsecured loan, meaning it typically does not require collateral, which individuals can use for a variety of purposes such as debt consolidation, home improvements, or unexpected expenses. Understanding the differences between these credit types is important for managing personal finances effectively.
Understanding Installment Credit
Installment credit involves borrowing a fixed amount of money that is repaid over a predetermined period through regular, fixed payments. Once the final payment is made, the loan account closes. Common examples of installment credit include mortgages, auto loans, and student loans, all of which feature a clear beginning and end date for repayment.
Understanding Revolving Credit
Revolving credit allows individuals to borrow and repay funds repeatedly up to a specific credit limit, without a fixed end date for the credit line itself. Payments are typically minimum amounts determined by the current balance. As funds are repaid, the available credit replenishes. Credit cards are the most common form of revolving credit, alongside personal lines of credit and home equity lines of credit (HELOCs).
Personal Bank Loans: An Installment Credit Type
A personal loan obtained from a bank is definitively categorized as a type of installment credit. This classification stems from the structured nature of these loans, where a borrower receives a single, lump-sum amount of money at the outset. The borrower then commits to repaying this specific sum, plus interest, over a set period through a series of regular, fixed payments. Upon the full repayment of the loan, the account is closed, preventing any further borrowing against that original agreement. This differs from a personal line of credit, which would be a revolving account allowing for continuous borrowing and repayment up to a limit.
How Personal Loans Function as Installment Credit
The operational mechanics of personal loans align directly with the characteristics of installment credit. Borrowers make consistent, scheduled payments, typically on a monthly basis, which are designed to fully amortize the loan by its maturity date. These fixed payments ensure the loan principal and interest are paid off within the agreed-upon term, which can range from a few months to several years. Interest on a personal loan is generally calculated on the remaining principal balance, meaning as the principal decreases with each payment, the interest portion of future payments also gradually reduces.
A fundamental aspect of personal loans as installment credit is the inability to re-borrow funds once they have been repaid. If a borrower pays down a portion of their principal, those specific funds cannot be accessed again from the same loan. Obtaining additional funds would necessitate applying for a completely new loan. On a credit report, personal loans appear as an account with an original balance that steadily decreases over time, contributing to a positive payment history as regular payments are made. This distinction is important because, unlike revolving credit, installment loans do not typically factor into credit utilization ratios, which measure the amount of available revolving credit being used.