Understanding the Difference Between Installment and Revolving Loans

When it comes to borrowing money, it's important to understand the difference between installment loans and revolving debt. An installment loan is a loan for a fixed amount that is repaid according to a set schedule. It has a fixed term and interest rate, and shows that you can return the money you borrowed consistently over time. Examples of installment loans include student loans, mortgages, and car loans.

On the other hand, revolving debt is a type of loan that allows you to borrow up to a certain amount, but you can borrow as much or as little as you want until you reach your limit. Credit cards are an example of revolving debt. Payday loans are not installment loans or revolving lines of credit. They have extremely high interest rates and are expected to be fully repaid with the borrower's next paycheck, usually within two weeks.

Payday lenders tend to focus on borrowers with bad credit, and failure to pay a payday loan can result in costly compound overdraft fees, aggressive collection calls, damage to the credit rating, a possible court subpoena, and even a wage garnishment. Before you borrow money, it's important to understand exactly how your debt will work, and one of the first things you should know is if it's revolving debt or an installment loan. The more loans you apply for, the worse your interest rate will be and the harder it will be to escape the fast loan trap. That's because rating agencies believe that credit card debt is a more reliable indicator of your risk as a borrower than installment debt.

Once you cancel a card, either by consolidating with a personal loan or by making regular monthly payments, you may want to leave the card open. These types of loans have the advantage of lower interest rates and the flexibility of choosing the length of the loan that fits your budget. Before you apply for a quick loan, learn more about what it is, what you're getting into, and whether it's a revolving loan or an installment loan. The actual terms of the loan you receive, including the APR, will depend on the lender you select, your underwriting criteria and your personal financial factors.

Lorrie Tappen
Lorrie Tappen

Incurable travel fan. Lifelong internet buff. Amateur zombie advocate. Friendly web ninja. Proud food junkie.

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