Searching for loan products online will surely give you a long list of web pages for your peruse. Today, there are various types of loans you can use, and the two most popular are online installment loans and revolving credit.
Newbie borrowers often confuse these two loan types, but they have different features you need to know.
When you take out installment loans online, the lending company will lend you a set loan amount with an installment repayment structure (click here to see more information). Revolving credit is different because there’s a credit line from which you can borrow whatever amount of money until you reach a specific limit.
Now, let’s find out more about the crucial difference between revolving credit and online installment loans.
How Borrowing Works On Installment Loans vs. Revolving Credit
At Arrest Your Debt, we preach “cash is king,” and interest makes other people rich while making you poor. However, if there truly are no other options for an emergency need or situation that arises, there are times when a loan may be an appropriate short term solution.
If you take out any type of loan, be sure it fits within your debt repayment plan to eliminate it as soon as possible. If you are forced to take out a short term loan, build up and emergency fund as soon as possible to avoid future emergencies that require an immediate loan.
Installment Loans Online
If you have a big purchase or emergency expenses, you can contact an online lender who sells installment loans. This loan product is your best financing option when you’re buying a house or a car or consolidating your debts if you don’t have an emergency fund set aside.
There are two types of interest rates for online installment loans: variable interest rate and fixed interest rate. A variable rate of interest means that your loan’s interest rate may go up or down throughout the loan term. On the other hand, a fixed rate of interest means that your loan’s interest rate stays the same until the loan matures.
If you want to get a loan where you know exactly how much you’ll pay at the end of the loan’s lifespan, choose a fixed-rate installment loan. If you want to test your luck, you can go for an installment loan with a variable interest rate and hope that your loan’s interest rate will go down based on the index rate (not a good idea).
People who have credit cards or HELOCs (home equity lines of credits) are sure to be familiar with revolving credit. This loan type allows you to take out a loan amount from a credit line until you reach the borrowing limit. For example, in a credit line with a maximum borrowing limit of $8,000, you can take $4,000 and only pay this loan amount with its interest.
For open-ended types of credit like credit cards, the credit line remains open to borrowers for an indefinite period. It means you can repeatedly draw out cash from the credit line and pay back what you owe. Some revolving debt has a credit line that remains open for a definite period only (say, five or ten years).
If you’re planning to obtain a revolving credit, you must make sure to control your borrowing behavior. Some borrowers draw out money from the credit line without paying attention to their accumulating debt. Always calculate your debt and make sure to pay what you owe regularly.
The Difference In Accessing Borrowed Funds
Revolving credit allows you to get whatever loan amount as needed from a line of credit. It’s beneficial if you often need funds for a business or a large purchase because it prevents you from taking out a new loan with its accompanying fees and interest rates.
Once the lending company approves your application for revolving credit, you can access the funds from a credit line. You also have the option not to use the funds from the credit line until you really need the money. But, be aware that there are lenders who will close your line of credit after a long period of inactivity.
Online Installment Loans
Applying for installment loans online is less hassle, and you can obtain the loan immediately once the lender approves your loan application. The amount of money you need is given to you in a lump sum. However, you will have to take out a new loan if you think the initial amount you’ve borrowed isn’t enough.
To avoid applying for a new loan, it’s a must to determine the exact amount you need before applying for an installment loan.
The Difference In Repayment Structures
Online Installment Loans
Online installment loans have pre-agreed repayment terms and schedules. Usually, you have to pay your loan amount and the interest on the debt each month until the end of the loan term. Installment loans have terms as short as six months or as long as thirty years.
The repayment structure of a revolving credit enables you to repay only the amount you’ve taken out from the credit line plus its interest. You can reduce the total amount you owe by repaying it over time, or you can repay it on the date of termination.
If you need cash, there are two popular loan options you can apply for: a revolving credit or an online installment loan. Read the guide above to know the difference in features and repayment structures between these two types of loans.