Is a Personal Loan Revolving or Installment?
Understand the fundamental difference between revolving and installment credit, and how personal loans are classified, impacting your financial profile.
Understanding the various types of credit available is a fundamental step in effective personal financial management. Each financial product carries distinct characteristics that influence how funds are accessed, repaid, and how they contribute to an individual’s financial standing. Recognizing these differences allows consumers to make informed decisions that align with their financial goals and capabilities.
Understanding Revolving and Installment Credit
Credit products generally fall into one of two main categories: revolving or installment. Revolving credit provides a borrower with a credit limit that can be used repeatedly. As the borrower repays the outstanding balance, the available credit is replenished, allowing continuous access. Credit cards are the most common example of revolving credit, where interest is charged on any unpaid balance carried over.
Installment credit, in contrast, involves borrowing a fixed amount that is repaid over a predetermined period through regular, fixed payments. Each payment includes both principal and interest, and once the loan is repaid, the account is closed. Common examples include auto loans, student loans, and mortgages, with the borrower receiving the full loan amount upfront. The interest calculation is based on the declining principal balance.
Personal Loans and Their Classification
Personal loans are classified as installment credit. When a personal loan is approved, the borrower receives a lump sum, which they then repay over a set period. This repayment schedule involves fixed monthly payments that include both principal and interest. The loan term, which dictates the number of payments, is established at the outset, commonly ranging from 12 to 60 months.
The fixed nature of personal loans means that once the loan amount is disbursed, it cannot be drawn upon again without applying for a new loan. This characteristic distinguishes them from revolving credit, where the borrowing capacity replenishes. While some financial institutions may offer personal lines of credit (which function like revolving credit), most products marketed as “personal loans” are structured as installment loans. This structure provides a predictable repayment plan and a clear end date for their debt.
Impact on Your Financial Profile
The distinction between revolving and installment credit impacts an individual’s financial profile and credit report. Installment loans, like personal loans, contribute to a borrower’s credit history through consistent, on-time payments. Each payment demonstrates financial responsibility, which positively influences the payment history component of credit scores. Successfully repaying an installment loan shows an ability to manage long-term debt.
Revolving credit, while also affected by payment history, uniquely impacts credit utilization. This metric measures the amount of credit being used against the total available credit, and keeping it low (below 30%) is favorable for credit scores. Since personal loans are not revolving, they do not directly affect credit utilization in the same way credit cards do. Instead, they become part of the ‘credit mix’ on a credit report, which can be beneficial by showing a diverse range of managed credit types.
From a budgeting perspective, the fixed payments of an installment personal loan offer predictability, making it easier to incorporate into a monthly financial plan. Interest on personal loans is calculated on the outstanding principal balance, similar to other installment debts, leading to a clear amortization schedule. Understanding how these credit types are viewed by credit bureaus and how they influence personal budgeting is important for maintaining a strong financial standing.