What are revolving credit and installment loans?

Revolving credit and installment loans are two different, yet foundational methods of payment. While both these methods are available in unsecured and secured forms, there are a few differences between the two.

Installment loans

Installment loans, also known as installment credit, are loans that have a fixed length and end date. Generally, in such loans, the principal is gradually decreased through installment payments over several years. Essentially, this type of loan is debt with a fixed payment schedule. Common forms of installment loans are mortgages, auto loans, student loans, and private personal loans. 

Revolving credit

Revolving credit can be considered as a source of credit that does not have a fixed payment plan. Unlike an installment loan, you can add to your balance. There is no deadline for payment, and instead you pay the minimum amount due each month. However, due to this, revolving sources of credit (such as credit cards) usually have low borrowing amounts and high interest rates. In most cases, your lender can legally raise the interest rate if you fail to make certain payments. 

Due to all the above reasons, revolving credit is considered much riskier than installment loans. It is also important to ensure that you don’t carry high balances with your revolving credit, since this will affect your credit utilization rate, which could lower your credit score.