The Difference Between Installment Loans and Revolving Lines of Credit
Of all the loan options available to you, most are either installment loans or revolving lines of credit. Not sure of the difference between the two? That’s why we’re here.
An installment loan is what you think of when you think about a loan. It includes everything from car loans and mortgages to personal loans and student loans. When you take out an installment loan, you’re agreeing to pay a set amount of money back over a specific period of time. From there, you make monthly payments based on the principal balance of the loan and its interest rate.
Generally, you pay the same amount each month. The amount you pay is divvied up between the interest accrued, which varies based on loan type and term length, and the principal balance, which is how much you borrowed. If you only make minimum payments for the duration of your loan, you’ll see that more of your payment goes toward interest in the beginning. This is because the interest is calculated off of the remaining balance of the loan, which is higher when you first start making payments. Over the course of your loan’s term, less of your payment goes towards interest, and more will go directly to the principal.
Revolving lines of credit
The most common type of revolving account is a credit card, but there are also personal lines of credit and home equity lines of credit that function the same way. Revolving lines of credit differ from installment loans because they give you access to a credit line that allows you to borrow up to that amount repeatedly on a monthly basis. How much you actually borrow month-to-month is up
How much you owe and whether or not you pay interest depends on how much you borrow and whether you pay the full amount off each month. With a line of credit, you’ll have a monthly due date and a required minimum payment, just like you would with an installment loan. The difference is that you can use the credit line as needed, giving you some added flexibility.
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