By Ben LuthiInstallment vs. Revolving Credit: What’s the Difference?
Quick Answer
Both revolving and installment credit accounts allow you to finance purchases, but the terms are different. Revolving credit allows you to borrow, pay back and borrow again. With installment credit, you can borrow a lump sum and repay it with fixed payments.
There are two common types of credit accounts: revolving credit and installment credit. Both allow you to finance purchases, but the terms and how you receive the money differ.
Revolving credit lets you borrow up to a set credit limit, repay what you owe and borrow again as needed. Installment credit, by contrast, involves borrowing a lump sum and repaying it through scheduled payments until the loan is paid in full. Both types of credit accounts can help—or hurt—your credit depending on how you manage them.
| Installment Credit | Revolving Credit | |
|---|---|---|
| Repayment | Fixed monthly payments over a set term | Flexible payments that vary based on balance |
| Interest | Interest is charged on the remaining loan balance; often fixed APR | Interest accrues on any unpaid balance; often variable APR |
| Credit score impact | On-time payments help build credit history | Utilization and payment history strongly affect scores |
| Examples | Auto loans, mortgages, personal loans and student loans | Credit cards, home equity lines of credit and personal lines of credit |
What Is Installment Credit?
Installment credit is a type of loan where you borrow a lump sum and repay it in fixed amounts—usually monthly—known as installments. Repayment terms can range from several months to many years. Common examples include mortgages, auto loans, student loans and personal loans.
When you apply for an installment loan, lenders review factors such as your credit score, credit history, income and existing debts. Interest rates may be fixed or variable, and some loans include additional fees like origination fees or closing costs. Comparing offers from multiple lenders can help you find the best rates and terms.
Pros and Cons of Installment Credit
Installment loans offer a structured way to borrow money, but they come with both advantages and drawbacks. Understanding these can help you decide whether this type of financing is right for your situation.
Pros
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Predictable monthly payments: Installment loans have fixed payment amounts and schedules, making it easier to budget and plan your finances. You'll know exactly how much you owe each month and when the loan will be paid off.
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Lower interest rates than credit cards: Installment loans often (though not always) have lower interest rates compared to credit cards, especially for borrowers with good credit. This can make them a more affordable option for larger purchases or debt consolidation.
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Flexible repayment terms: Installment loans offer a range of repayment periods to fit different budgets and goals, usually ranging from a few months to 30 years, depending on the loan type. Shorter terms mean higher monthly payments but less interest paid overall, while longer terms reduce your monthly payment but increase total interest costs.
Cons
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Additional loan fees: Many installment loans come with fees such as origination fees, application fees, late fees and prepayment penalties that increase the total cost of borrowing. Mortgage loans also typically include closing costs.
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No flexibility on payments: Installment loans lock you into a long-term payment obligation that can't be easily adjusted if your financial circumstances change. Missing payments can lead to default, damage to your credit or loss of collateral used to secure the loan.
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Possible damage to your credit: Making a late payment on your installment loan or missing payments altogether can damage your credit. In fact, late payments can remain on your credit reports for up to seven years, making it challenging to apply and qualify for credit in the future.
What Is Revolving Credit?
A revolving credit account allows you to repeatedly borrow money up to a preapproved limit and repay it over time. Credit cards, personal lines of credit (LOCs) and home equity lines of credit (HELOCs) are all types of revolving credit. Banks, credit unions, credit card issuers and other lenders provide revolving credit accounts.
When you're approved for a revolving credit account, the financial institution sets a credit limit that you can borrow up to repeatedly. Generally, you can pay off the balance in full, make minimum payments or choose another payment amount each month.
Revolving credit can be either secured or unsecured. A secured line of credit is backed by collateral, such as your home (as with a HELOC), while unsecured revolving credit is not. And, although the interest rate you pay on a revolving credit account could be higher than with an installment loan, you only pay interest on any balance that you carry over from month to month. With a HELOC, you may also pay closing costs on the loan, and some lines of credit and credit cards come with annual fees.
Learn more: What Happens if You Only Pay the Minimum on Your Credit Card?
Pros and Cons of Revolving Credit
Revolving credit can be a convenient way to pay for purchases or even fund a large project, like a home renovation. However, like most types of credit, there are benefits and drawbacks.
Pros
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Only borrow what you need: With revolving credit, you can borrow only the amount you need and pay interest only on carried balances. As you pay down your balance, that credit becomes available to use again.
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Easy access to funds: Once approved, you can access funds quickly up to your credit limit, making revolving credit convenient for ongoing or unexpected expenses. Credit cards typically have fast approval processes, though HELOCs may take several weeks due to more diligent underwriting.
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Potentially high borrowing limits: Revolving credit can offer substantial credit limits depending on the product type and your qualifications. Lines of credit can range from $250 to $1 million or more, and credit card limits commonly reach $10,000 or more.
Cons
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Borrowing limits based on creditworthiness: Your lender sets a maximum credit limit based on your credit profile, and borrowers with poor credit may only qualify for smaller amounts. This can limit your access to funds when you need them most.
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Higher interest rates: Credit cards often carry higher interest rates than other types of credit, and most revolving accounts have variable rates that can increase over time. However, you can avoid interest charges entirely by paying your balance in full each month.
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Easy to overspend: The convenience and ready access to funds up to your credit limit can make it tempting to spend beyond your means. Carrying high balances or missing payments can damage your credit and lead to mounting debt.
Revolving Credit vs. Installment Credit
Neither installment nor revolving credit is inherently better, and many people use both types to manage different financial needs. The key is knowing which option makes the most sense for your specific situation. Here's a closer look at how they differ:
- Payment structure: Installment loans have fixed monthly payments for a set term, making it easier to budget and plan ahead. Revolving credit has variable payments based on your balance, with only a minimum payment required each month.
- Interest charges: With installment loans, you pay interest on the full loan amount over the entire repayment period. Revolving credit only charges interest on balances you carry from month to month, and you can avoid interest entirely by paying in full each billing cycle.
- Borrowing flexibility: Installment loans provide a one-time lump sum that you repay over time, with no option to reborrow without taking out a new loan. Revolving credit lets you borrow, repay and borrow again up to your credit limit as needed.
- Qualification requirements: Installment loans typically require good to excellent credit for the best rates and may involve a more rigorous approval process. Revolving credit accounts like credit cards are often easier to qualify for, though your credit limit depends on your creditworthiness.
- Long-term cost: Installment loans let you calculate the total cost upfront since payments and terms are fixed. Revolving credit costs can vary significantly based on how much you borrow, how long you carry balances and whether interest rates change.
With those differences in mind, installment loans tend to work well for large, one-time expenses like buying a car, financing home improvements or consolidating debt when you want predictable payments. Revolving credit is ideal for ongoing expenses and projects or purchases you can pay off quickly, especially if you earn rewards.
Frequently Asked Questions
The Bottom Line
Because payment history is the most important factor when calculating your credit score, making all your monthly payments on time is crucial. Late or missed payments on either revolving or installment credit accounts can negatively affect your credit.
Conversely, making on-time payments can help improve your credit over time. Check your FICO® ScoreΘ for free at Experian before applying, and, if needed, improve your credit before you apply to get the best rates and terms possible.
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About the author
Ben Luthi
Ben Luthi has worked in financial planning, banking and auto finance, and writes about all aspects of money. His work has appeared in Time, Success, USA Today, Credit Karma, NerdWallet, Wirecutter and more.
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