Differences Between Revolving and Installment Debt
Written by Kasey Ng   


There are two main types of debt: revolving credit and installment credit. Generally speaking, installment credit is a one-time loan; you can just borrow once and pay it back in the future. To take on an installment credit, you agree to pay a fixed amount of monthly payment, and you know in advance how long it takes for you to pay off the loan, normally generated by an amortization calculator. Examples of this type of loan are mortgages, student loans and car loans.

In contrast, revolving forms of credit are more open-ended than installment loans. You are given a limit of amount you can borrow, and you can borrow and pay back many times to finance different purchases. Examples will be credit cards and lines of credit.

Here is a summary comparison of the key attributes between revolving debt and installment debt:


 Installment Debt
 Revolving Debt
Type of Loan
 One time loan. Line of credit.
Used For
Finance big purchases.
 Finance daily small purchases.
Ease of Approval
 Hard Easy
Required Monthly Payment High monthly payment. Low monthly payment.
Interest Rate Low interest rate, usually between 5%-7%. High interest rate, can be ranged from 10% to 20%.
Length of Loan Fixed length, based on the agreement. Flexible, as long as debtors pay the minimum payment.
Riskiness Low risks since debtors agree to pay fixed monthly payment, You will not accumulate more debt than you originally expect. High risks because debtors can choose to pay only minimum balance, which make it much more difficult to pay off when it accumulates so much interest.
Examples Mortgages, Car loans. Credit cards, lines of credit.

Due to the high interest and low required payment, revolving debt is the one that get most people into debt trouble. Therefore, be sure to look at the terms and condition before you sign up for a revolving debt. And more importantly, try to pay off the balance each month so that you do not need to pay much interest.



 
Last Updated on Friday, 24 December 2010 06:12