By Michelle Flores / Updated: Oct 1, 2019

What’s Better: Revolving Credit Or Installment Loans?

Revolving Credit VS Installment Loan
There are two main types of credit which can affect your credit report and credit score: revolving credit and installment credit.

Here you will get to know more about these two types of credit so that you can make an informed decision.

Particularities of Revolving Credit

Revolving credit is a type of financial arrangement that implies having a limit of funds that can be used by the borrower within a particular period of time. Though, it does not have any predetermined amount. An excellent example of the revolving loan are credit cards; The holder has a limit on the maximum amount they can borrow.

The amount that you can spend within that limit, however, is upon the client. In revolving credit, the borrower makes charges, pays them then goes ahead to make other charges.

Revolving lines of credit are ideal for all seasonal companies and businesses which suffer from sales fluctuations. For instance, in your low and high sales seasons, a revolving line of credit creates a bridge.

Pros of Revolving Credit

  • Readily available funds – revolving line of credit funds are always available. If you have an already existing line, you don’t need to pass through the loan approval process several times. You can use the funds you need from the already approved limit, as long as you stay within that limit.
  • Secure financing – some revolving lines of credit have asset security. The security is based on real estate, equipment, inventory, and other valuable assets.
  • Less interest – the interest is usually lower especially when you are ready to submit assets as collateral.

Cons of Revolving Credit

  • Higher interest fees – the interest for the revolving lines of credit is higher than that of the traditional loans.
  • Commitment fees – most revolving lines of credit include commitment fees. The fees can sometimes be substantial such that it makes more sense to get a different type loan.
  • Low credit limits – as compared to the conventional loans, revolving lines of credit are fluid and thus the approved amount is usually smaller. You should rather stick to the traditional installment loans if you are looking for a more significant amount.

Difference between installment and revolving credit

Particularities of Installment Credit

Intallment Credit it is a type of credit where the borrower makes fixed and regular payments every month, or in the predetermined period. The loan amount is determined at the approval time. Car loans, installment loans, personal loans are perfect examples of installment credit.

Pros of Installment Credit

  • Easy to manage – the primary advantage of an installment loan is that you can break it down into small amounts. For instance, if you take a $2000 loan amount; you don’t have to repay it at once. You can divide it into small equal amounts and pay little amounts. The staggered payment method gives you enough time to look for enough money.
  • Fixed payments – the monthly payment amount is predetermined. This allows you to plan, and thus have better management of your funds. You cannot experience a sudden increase in your APR when using an installment credit.
  • Allows the borrower to invest in the best paying financial instruments – when you decide to pay in small monthly installments, you will have a lower interest per installment. You can divert the most substantial portion o your income towards the fixed money market instruments with a significant rate of return. By this way, you will get a higher profit more than the amount of interest you would be paying in the long run.
  • Low borrowing cost – the borrowing costs tend to be low in many cases. This is because the costs are spread over to a more extended repayment period.

Cons of Installment Credit

  • Stringent checks – most financial institutions perform strict verifications on the borrower’s credit score, verifications of the sources of income, debt to income ratio and many others. The checking could be time-consuming.
  • No pre-payments – most financial institutions don’t accept pre-payments. The borrower is charged with some penalties when they make prepayments.

So what’s the best?

When used responsibly and correctly, the two financial tools are useful for business growth. However, before you decide on any, be sure to carry out detailed research, compare lenders and finally involve a financial advisor to help you.

Works Cited

1 SimpleDollar “Which is Worse for Credit Score: Revolving Debt or Installment Debt”

2 Bankrate.Com “Installment credit ”

3 Investopedia “How Installment Loans Work”

4 Credit Karma Inc. “What is revolving credit?”

5 U.S.News “What Is Revolving Credit – and How Can It Ruin Your Credit Score? ”

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