Revolving Credit Vs. Installment Credit: What's the Difference?

While looking for external funding, you will find two types of credit accounts: revolving credit and installment credit. While both allow you to access the needed funds when required and repay them over time, the terms vary depending on the credit type you borrow. Below, you will learn more about these two types of credit accounts and understand their meaning and differences. Accordingly, you can choose the right credit type suitable to your needs and repayment convenience.

What is Revolving Credit?

Revolving credit is a line of credit you can use to repeatedly borrow money from your pre-approved credit limit and repay over time.

When you get a revolving credit approval, the finance company sets a credit limit through which you can borrow repeatedly. Usually, you can repay the balance in full, pay the minimum balance, and repay your convenient amount each month. Depending on the financer's policy, a revolving credit account can be secured or unsecured. Although the revolving account interest rate is higher than installment accounts, it becomes payable only when you withdraw from your credit limit. You don't need to make any payment if you don't borrow.

Pros >Pros & Cons of Revolving Creditamp; Cons of Revolving Credit

Now that you understand the revolving credit meaning, you know it is a convenient way to cover various big-ticket expenses in life. However, it has pros and cons as follows:

Pros:

Borrow Only What You Need: You get a credit limit up to which you can borrow according to your requirement. Pay off the balance after borrowing, and the credit limit is again available for borrowing. Plus, the interest is payable only if you carry a balance over months. For instance, if you have a credit limit of Rs 1 Lakh and you borrow only Rs 50,000, you must pay back only that portion with interest. The remaining Rs 50,000 stay dormant, and you don't need to pay any interest for it.

Easy Funding Access: The approval process is quick based on your income, credit history, and repayment capacity. Once approved, you can quickly withdraw the required amount from your available credit limit without documentation or other formalities.

Higher Borrowing Limits: Revolving credit accounts have high credit limits up to which you can withdraw according to your requirement.

Cons:

Preset Borrowing Limit: Although you may get a high credit limit, it usually depends on your credit history. You cannot go beyond your credit limit when you need more.

High-Interest Rates: Revolving credit accounts like credit cards have high-interest rates. You must borrow interest only on the amount you withdraw from your credit limit, but the interest cost will be considerable.

Chance of Overspending: With immediate access to funds, you can easily withdraw more than you need and spend.

What is installment Credit?

installment credit is a loan you borrow in a lump sum and pay back in fixed monthly installments. The repayment period may range from a few months to years. Personal Loans, mortgage loans, home finance, etc., are common types of installment credit accounts.

When you seek installment credit, the lender determines your loan amount, interest rate, and other parameters based on your credit history, income, DTI ratio, work experience, job stability, etc. The interest rate can be fixed or floating, and you may need to pay additional fees like processing charges, prepayment fees, etc.

Pros >Pros & Cons of installment Creditamp; Cons of installment Credit

Installment credit is tailored to your needs, whether Personal Loans, mortgage loans, home loans, etc. However, there are pros and cons to consider:

Pros:

Receive a Lump Sum: With an installment loan, you receive the approved amount in a lump sum. You must repay it in installments distributed across the number of months in the loan tenure.

Fixed EMIs: Installment loans have fixed EMIs you must pay for a specified period. So, you can stick to your budget and plan repayment according to your financial capacity.

Flexible Repayment: Most loan providers are flexible in their repayment terms. You can choose a repayment term with EMIs you can easily afford and pay off the loan as convenient to your monthly budget.

Lower Interest Rates: Unlike revolving credit, installment credit accounts have lower interest rates.

Cons:

Additional Charges: Every time you apply for a loan, you must pay additional charges like processing fees, origination fees, documentation charges, service charges, etc.

Interest Payment: If you borrow more than your requirement, you must repay it with interest even if you did not use the entire loan amount.

Revolving Credit vs Installment Credit

Conclusion

Revolving credit vs installment credit is a never-ending debate. Therefore, you must decide based on your financial requirements and goals. If you prefer fixed interest and payment terms, installment credit is ideal. For payment and interest flexibility, revolving credit would be more suitable. Whichever type of credit you borrow, manage it responsibly and repay on time to build your CIBIL score and improve your creditworthiness.

FAQs

What is an example of revolving credit?

Credit cards, Personal Loans, etc., are a few examples of revolving credit.

What is an example of installment credit?

Personal Loans, mortgage loans, education loans, car loans, etc., are a few examples of installment credit.

Which is better, revolving or installment?

Both revolving and installment credit are useful tools to meet financial goals but have unique pros and cons. Therefore, your choice depends on your funding requirement, how frequently you need extra funds, and your preferred repayment plan.