What Are Examples of Revolving Credit and Installment Loans?

Consumer credit enables individuals to acquire goods and services or manage expenses. Understanding the different types of credit available helps individuals make informed financial decisions. Each credit type offers distinct features regarding how funds are accessed, repaid, and their associated costs.

Understanding Revolving Credit

Revolving credit is a flexible type of credit account that allows a borrower to repeatedly access funds up to a pre-approved credit limit. As payments are made, the available credit replenishes, allowing the borrower to use the credit again without reapplying for a new loan. There is typically no fixed end date for a revolving credit account, and interest is generally charged only on the outstanding balance. Revolving credit accounts usually require a minimum monthly payment if a balance is carried over from one billing cycle to the next.

Credit cards are the most common example of revolving credit. A credit card provides a credit limit, and consumers can make purchases up to that limit. If the full balance is paid by the due date, no interest is charged. However, if a balance is carried over, interest accrues on the unpaid amount. Credit card interest rates are often variable and can be higher than those for installment loans.

Personal lines of credit function similarly to credit cards but usually do not involve a physical card. Instead, borrowers might access funds through checks or direct transfers to their bank accounts. During a specified “draw period,” which can last several years, individuals can borrow, repay, and re-borrow funds as needed. After the draw period, a repayment period begins, during which the remaining balance is paid off, often with fixed monthly payments.

A Home Equity Line of Credit (HELOC) uses the equity in a homeowner’s property as collateral. A HELOC provides a revolving credit line, allowing the borrower to draw funds up to a set maximum amount. HELOCs often have variable interest rates and typically include a draw period, often up to 10 years, followed by a repayment period.

Understanding Installment Loans

Installment loans provide a borrower with a fixed amount of money, disbursed as a lump sum, which is then repaid over a predetermined period through regular, fixed payments. Each payment includes a portion of the principal borrowed and interest on the loan. Once the loan is fully repaid, the account is closed, and to borrow additional funds, a new loan application is necessary. Installment loans typically have a set interest rate and a specific end date for repayment, offering predictable monthly payments.

Auto loans are a common type of installment loan, used to finance the purchase of a vehicle. The loan amount covers the cost of the car, and the borrower makes monthly payments over a term that can range from three to seven years or longer. The vehicle itself serves as collateral, meaning it can be repossessed if the borrower fails to make payments. Interest rates for auto loans can vary, influenced by factors like credit score and loan term.

Mortgages are another significant category of installment loans, designed for purchasing real estate. These loans are typically long-term, with repayment periods often spanning 15 to 30 years. The borrower repays the lump sum in fixed monthly installments that include principal and interest. The purchased property serves as collateral for the mortgage.

Student loans are installment loans used to cover educational expenses. These loans are disbursed as a lump sum or in installments to the educational institution, and repayment begins after a student completes their studies or drops below a certain enrollment level. Repayment terms can vary significantly, often ranging from 10 to 25 years, with fixed or variable interest rates depending on the loan type.

Personal installment loans provide a lump sum that can be used for various purposes, such as debt consolidation, home repairs, or unexpected expenses. These loans typically have repayment terms ranging from a few months to several years, with fixed monthly payments. Interest rates and terms for personal loans depend on factors such as credit score, income, and the loan amount.

Distinguishing Between Revolving Credit and Installment Loans

The fundamental difference between revolving credit and installment loans lies in how funds are accessed and repaid. Revolving credit allows repeated access to funds up to a limit, with available credit replenishing as the balance is paid. An installment loan provides a single lump sum repaid over a fixed period, and once paid off, the account closes. A new application is required for additional funds.

Repayment structures also differ significantly. Revolving credit typically requires a minimum monthly payment, but the borrower has the flexibility to pay more or pay the full balance to avoid interest charges. The monthly payment amount for revolving credit can fluctuate based on the outstanding balance. Installment loans, however, feature a fixed repayment schedule with consistent monthly payments that include both principal and interest, making budgeting more predictable.

Regarding the loan term, revolving credit accounts do not have a fixed end date for repayment, remaining open as long as the account is in good standing and minimum payments are made. This allows for ongoing access to credit. Conversely, installment loans have a predetermined loan term, meaning there is a specific date when the loan will be fully repaid and the account closed.

Interest calculation also varies between the two types of credit. With revolving credit, interest is generally charged only on the outstanding balance carried over from month to month. Interest rates on revolving credit are often variable. For installment loans, interest is calculated on the entire principal amount borrowed and is amortized over the loan term, with payments typically including both principal and interest. Installment loans frequently have fixed interest rates, providing stability in payment amounts.