Installment Loan or Revolving Credit – Which Is Better?

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Everyone experiences hardships in one way or another. Bills pile up, money gets tight and it may seem impossible to pay back all your debts. Getting ahead may not seem like a viable option. Do not worry. There are plenty of options you can choose from, regardless of you being a small business owner looking for more cash flow or you are an individual looking to get your finances under control.

When it comes to borrowing and lending, there are two types of credit repayment options. They are revolving credit and installment credit. The two are very different. If you are looking for a way to borrow money, but you cannot decide which is the best option we have a complete guide.

Installment Loan

Installment loans are paid back through scheduled, consistent payments. Over time your principal will gradually reduce as well as interest because of your consistent payments. Eventually, you will be all paid up and your credit cycle for this loan will end. You will get a loan term, which basically states a predetermined length and end date. You will also get an amortization schedule. This basically shows the timeline of when your principal will be reduced over the course of your loan term.

These are typically intended for long-term borrowing of high amounts. Typical installment loans include things like mortgages, car loans, student loans and private personal loans. You can get either a secured or unsecured installment loan, but you will most commonly see secured installment loans. What this means is that your loan is secured using your assets as collateral. For example, if you take out a mortgage your home will be used as collateral. The same thing can be said if you take out an auto loan.

Since installment loans are typically secure, their interest rates are lower. They are also known to be less risky to your credit score than if you were to go with the revolving credit option.

Revolving Credit

This is another common way to receive cash fast. This is credit that is made anew every time the debt is paid off. The most common forms of this are credit cards and lines of credit. When you apply for this type of credit, you receive a credit limit based on your credit history and credit score. No matter how many payments you make, or how often, your credit limit will not change. Revolving credit is a great option if you are looking for an option that will allow you to borrow as much as you want (within your credit limits) and as often as you want. Because of this, you are granted a lot of flexibility.

There is no need to establish a payment plan with this option because you are not borrowing a huge sum of money all at once. There is not a fixed-term on this. That means that you can pay off your balance as quickly or as slowly as you want. Be sure that you are paying at least the minimum amount every month so you do not miss payments or default on your account.

You can also expect varied interest rates as it depends on the current market rate. This can be really inconvenient because if the current market rate increases while you are still paying off on the money you borrowed, you may be paying a higher rate and there is nothing you can do about it.

Revolving is can be both secured and unsecured. It is known that revolving credit is riskier on your credit than installment loans. This is because having a big balance on your credit card can bring your credit score down. When borrowing from an unsecured revolving credit account, you can expect your interest rates to be anywhere between 15 percent to 20 percent, and remember that the interest rate is not fixed. Your lenders can up the interest rate at any given time if you do not make your payments.

Advantages And Disadvantages

Installing loans or revolving credit has its advantages and disadvantages. Before you find installment loans in Nevada with Wise Loan or wherever you are local and decide which option is the best one for you, we have explained the benefits and drawbacks of each.

Installment Loans Advantages

The biggest advantage of going with the installment credit option is the consistency in knowing how much to pay every month. Installment loans have a set monthly repayment price for a set amount of time. This may help make budgeting easier. You know every month, around the same time, you have to pay the same amount. You can easily save up and pay off that monthly balance, so you do not have to worry about falling behind or not paying it.

You can also adjust your monthly repayment plan. It can be drawn out longer which means you can make lower monthly payments in exchange for extending the repayment time. This is an excellent option if your financial situation has changed but you still want to make payments on your loan.

Installment credit can also be a cost-efficient option compared to revolving credit because you have lower interest rates and fees. Your interest rate can be as low as two percent for secured loans and 18 percent to unsecured loans. Low-interest rates save you tons of money in the long run because over the course of your repayment term, you can pay more of the principal than the interest.

Installment Loans Disadvantages

One of the biggest of these is the fact that you are likely not allowed to pre-pay your loan balance, meaning you cannot pay more than the monthly amount you are required to pay. You are not even permitted to paying off your debt in full until the end of your loan term unless you are willing to pay a prepayment penalty. The qualifications for being approved for this type of loan is also more difficult. They take into account your income, your other outstanding debt as well as your credit history.

Revolving Credit Advantages

Revolving credit is not all bad, though it may seem like the financial community condemns the use of credit cards. Revolving credit can be really beneficial for you if used responsibly and in the correct manner it was intended. When paying off your balance, you are allowed to pay more than what is required without getting hit with prepayment penalties. If your credit limit is $200 with a minimum payment amount of $25 a month and you pay $50 one month and $200 the next month, you will not be penalized.

The qualifications for being approved for this line of credit are also more relaxed. They still use things like your credit history, credit score and your outstanding debt but it may not be as stringent, even if you are considered a high-risk borrower.

Revolving Credit Disadvantages

There are many disadvantages to revolving credit just as there are disadvantages to anything. The first one is that your interest rates will be higher and you may come up against some user fees. You can expect to have a credit card with an interest rate of nine to 25 percent. This can make paying off your debts more expensive than the debt itself if done over a long period of time.

There are also a lot of fees associated with revolving credit like late payment fees, exceeding credit limit fees and annual maintenance fees. Revolving credit is also a riskier business than taking out an installment loan. If you are constantly running up your credit card balance, that could drag your credit score way down.

installment loan or revolving credit

Bottom Line

Both installment loans and revolving credit are a great way to get ahead of your financial headaches, but they must be used with a strategy in mind to avoid your debt problems getting worse. It is completely common for people to take out installment loans to pay off your revolving credit loans. As long as you stay dedicated to using your credit card less once you pay off the balance, you can kiss your debts goodbye in no time.

Installments are the better loan option because the interest rates are lower and you can adjust your repayment plan if needed. If you are trying to do a big-ticket purchase like a home or a car, an installment loan is a way to go. If you are looking for something a little more short term and you want the option to pay down your balance upfront or early, revolving credit is your best option.

When everything else fails a great financial advisor will be able to further guide and direct you toward the best financial decision. Getting ahead of your debt can be challenging and tough. It is ok to ask for help. Seeking a financial advisor who will be able to give you a financial strategy is key to achieving the financial freedom you always wanted. 

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