Two of the most common types of personal credit you will encounter are revolving credit and installment loans. Each works differently, so understanding how they compare can help you make smarter financial decisions.
What Is Revolving Credit?
Revolving credit gives you access to an ongoing line of credit that you can use repeatedly up to a set limit. Credit cards are the most common example of revolving credit – you charge purchases, pay down the balance, and then charge again without reapplying for new credit.
With revolving credit, you’re not borrowing a specific amount upfront. Instead, you have flexibility to borrow what you need when you need it. Your monthly payment varies based on your balance, though you’ll always have a minimum payment due.
Pros of Revolving Credit:
- Ongoing access to funds without reapplying
- Flexibility to borrow varying amounts as needed
- Only pay interest on the money you actually use
Cons of Revolving Credit:
- Variable payments can make budgeting difficult
- Easy access to money can lead to overspending
- High balances can negatively impact credit utilization ratios
What Is a Personal Installment Loan?
Personal installment loans are a type of loan where you’re given a sum of money upfront and must pay it back in fixed amounts or “installments” over a set period.
Many different types of lenders, including banks and credit unions, offer personal installment loans. Consumer finance companies specialize in personal installment loans and often serve borrowers who may have difficulty obtaining credit elsewhere. These lenders frequently process applications quickly, sometimes on the same day, and can design repayment schedules that fit borrowers’ income situations.
Pros of Personal Installment Loans:
- Fixed monthly payments make budgeting predictable
- A clear payoff date makes financial planning easier
- Closed end credit reduces likelihood of over-borrowing
- Your credit utilization ratio is reduced as you repay the loan
Cons of Personal Installment Loans:
- Less flexibility since you can’t reborrow without a new application
- Some lenders charge origination fees
- Some loans may have prepayment penalties (though many don’t)
- A credit check may be required for each new loan
When Revolving Credit Makes More Sense
For Everyday Expenses: You can easily use a credit card for everyday purchases and potentially gain benefits like fraud protection. Plus, if you pay your balance in full each month, you will not pay any interest.
For Emergency Cushion: Having access to revolving credit provides a financial safety net. If your car breaks down or you face an unexpected medical bill, you don’t need to wait for loan approval because the credit is already available.
For Unpredictable Amounts: If you’re not sure exactly how much you’ll need to borrow revolving credit’s flexibility may be useful. You can borrow only what you need rather than taking out more (or less) than required with a fixed loan amount.
For Building Credit History: If you have limited credit history, a secured credit card or low-limit revolving account can help establish a track record. Making small purchases and paying them off builds positive payment history.
When Personal Installment Loans Make More Sense
For Large, Specific Purchases: If you’re buying furniture, financing a home improvement project, or making another significant one-time purchase, an installment loan provides the funds you need upfront with a fixed monthly payment, making it easier to plan your budget.
For Debt Consolidation: According to Bankrate, using a personal loan to consolidate high-interest revolving debt can improve your credit score by reducing your credit utilization ratio. Plus, you trade multiple, varying payments for a single predictable one, simplifying your finances.
When You Value Clear Terms: With an installment loan, you know exactly when you’ll repay the loan and exactly what each monthly payment will be. There’s less temptation to keep borrowing more or risk letting a balance revolve indefinitely. CNBC notes that this structure helps demonstrate financial responsibility to future lenders.
For Managing Imperfect Credit: Consumer finance companies often work with borrowers whose credit scores wouldn’t qualify them for the best credit card offers. The fixed payments and terms make these loans easier to manage, helping borrowers rebuild their credit through consistent on-time payments.
When You Want Personal Service: Many consumer finance companies maintain physical branch locations, which can be valuable for borrowers navigating credit challenges. The Corporate Finance Institute states that in-person interactions allow landers to gather more information and consider factors beyond just automated credit scoring. Local branches also provide accessible support throughout your loan term if questions or issues arise.
What is right for you?
The choice between Revolving Credit and a Personal Installment Loan depends on your specific needs. Revolving credit works well for ongoing expenses, purchases you can pay off quickly, and situations requiring financial flexibility. Equifax points out that having both types of credit strengthens your credit profile by demonstrating you can manage different account types.
However, if you’re making a large purchase, consolidating existing debt, have less than perfect credit, or simply prefer the security of knowing exactly what you’ll pay each month, a personal installment loan deserves serious consideration.
If you think that a Personal Installment Loan might be the right choice for you, Courtesy Finance is a local, installment lender based in Atlanta, GA that operates convenient, local branches in Metro Atlanta, North Georgia, and Eastern Tennessee. Find one of our local branches or apply online today.
