There is a huge distinction between installment credit and revolving credit. Installment credit is repaid with periodic payments. Installment loan means a gradual decrease and full repayment later on. Payments for revolving credit are open-ended, and one can borrow the funds once again.
Those both types of loans can be secured and unsecured. But secure installment loans are the most widespread. Let us go into details.
The main terms you should pay attention to when taking the installment credit are its length and date of expiration. It is comfortable because of the amortization schedule: it means you will return the borrowed money whenever you can during several years. If you take installment monthly loans, you should repay a certain amount of money every month. This is the most common payment schedule.
Installment credits include student loans, individual loans, vacation loans, home improvement loans, auto loans, mortgages and some equity loans. Such type of loan is the best choice for those who want to borrow money only once. You get a check, which shows you when you should make repayment and how big will it be.
Installment credits are supposed to be less hazardous, than the revolving ones. It is also much easier to get them because you are not always requested collateral. But if you are and do not follow the terms of the loan, this collateral can be taken by the lender.
Before giving revolving credit, a bank checks if the applicant is financially secure. They check whether he has a stable job, look at his credit score and what is his income. If an applicant is a company, they take into account statement of income and cash flow statement.
In case of the positive decision, a bank will settle the maximum credit sum that depends on financial security. This maximum sum is called the credit limit. Revolving credit helps individuals and companies get extra funds when they need them. It is convenient for them to open line credit and get money in case of extra expenses.
In comparison to installment loans, the revolving credit borrower should pay higher fees. Additionally, the rate is not fixed and changeable. So the Federal Reserve is the one that increases interest rates. So when it changes the interest rate, the revolving credit line rates grow up too. The issuing bank can request extra fees for revolving line of credit.
How do these credits affect your credit score?
Not only the definitions of these loans differ, but also the influence on your credit score.
You have apparently heard that duly payment of any kind of loan is the key to the high credit score. The kind of loan makes no difference. Just pay it without delay, and your credit score will not decrease.
If you have both installment and revolving loans, better focus on the revolving one. Credit Utilization Ratio comprises 30% of your credit score characterizes your credit limit. In case credit scoring model shows this number is too much, your credit score will go down deliberately. An interesting fact: according to this survey half of surveyed millennials do not know whether their current credit score is good or bad.
Installment loans are mostly secured. If you fail to return the money, the lender can take your collateral, and it will compensate losses. On the contrary, revolving loans are unsecured. You give no collateral, and the lender takes the risk. If you do not return money in time, it will reduce your credit score a lot.
However, if your lender does not report to you to the credit bureau, you are out of risk. And if you have bad credit, it is probably true for you. Title and payday lenders are mostly the ones who do not report. Their grateful customers are satisfied with stable credit history.