Are you in need of some urgent cash? Then you’ll come across two credit products – instalment and revolving credit. By opening these credit accounts, you can easily borrow money. However, you must understand their differences to manage your finances. This article explores revolving credit vs instalment credit and the aspects that separate them.
Revolving credit allows you to borrow an amount, repay it and borrow again if needed. You borrow a lump sum amount for instalment credit and pay it off in instalments.
Curious to know more? Read on.
The primary difference between instalment credit and revolving credit is how you repay the money. With revolving credit, you can borrow money up to a specified limit. Depending on the lender, you might receive a high credit limit to support your finances.
So, when you reach this limit, you start paying back the initial amount until you're done. After that, your lender or bank will refill the credit limit. It means you can borrow whenever you want as long as you pay back in time.
For an instalment credit account, you'll get a specified amount with no fixed credit limit. You need to pay back the amount in fixed instalments on a monthly or yearly basis. After you've paid the amount in full, the lender will close your account.
The interest rates of revolving accounts may depend upon economic fluctuations and your outstanding balance. You might pay a high amount for the amount you carry over to the next month. So, the interest can vary if you pay off the amount quickly with fewer carryovers.
On the other hand, instalment credit accounts usually have fixed interest rates. This rate will stay the same throughout your payment period, so you'll know the exact amount to pay. Moreover, select a short-term loan if you want to pay less interest on instalments. It helps you plan your expenses and save efficiently.
The greatest advantage of revolving credit over instalment credit is flexibility. Revolving credit enables you to borrow funds as much as you need, whenever needed. Plus, you'll pay interest only on the amount borrowed amount.
You can return the rest of the amount without any issues.
In contrast, instalment credit accounts don't offer such flexibility. You'll get a fixed lumpsum amount with a specified repayment period. Even if you don't utilise the entire amount, you have to repay it in full with interest.
In addition, if you need extra funds, you must open a new instalment account and start from scratch.
Managing your credit score is a significant factor while analysing instalment loans vs revolving credit.
For revolving credit accounts, you might be utilising a high percentage of your available funds or credit. If the outstanding balance is high, it indicates that you're not managing your finances properly. This lowers your credit score.
Paying outstanding debts quickly can lower credit utilisation and improve your credit score.
If you choose an instalment credit account, credit utilisation isn't a big problem as the amount and instalment period are fixed. Keep paying the instalments on time, and your credit score will remain unaffected.
So, revolving vs instalment credit is a debate that’ll be settled based on your financial goals. If you need fixed payment terms and interests, instalment credit will be ideal. For more flexible payments and interests, revolving credit accounts will suit you.
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Revolving credit will be ideal if you want higher borrowing limits and flexible payments and don't need a lump sum amount.
Examples of revolving credit include personal lines of credit and credit cards.