Around 73.2% of Canadians have debt. Some owe money on credit cards, while others have car loans, but most Canadians have some debt.
You might not owe money now, but you’ll likely need a loan at some point. Thus, learning about the common loan types is helpful.
The two primary options are revolving debts and installment loans. Both offer a way to borrow money, but each is different.
Continue reading this guide to learn the primary differences between revolving vs. installment loans.
What Is Revolving Credit?
Revolving credit is a line of credit a borrower can access repeatedly. Revolving credit lines have several features that set them apart from other types of credit.
Here are the primary features of revolving credit lines:
Predetermined Credit Line
A revolving debt is a credit line with a predetermined limit. For example, a lender might offer a revolving line of $1,000. While you can borrow the full amount, you can also borrow less.
Revolving lines let you borrow money when needed, and you can choose the amount. However, you can only borrow up to the predetermined approved amount.
A revolving debt requires payments, but the payment requirements vary. When you make a payment, your account balance decreases. As a result, it frees up credit you can borrow.
For example, suppose you owe $700 on a revolving line of credit with a $1,000 credit line. You’ll have $300 of available credit to use.
However, you’ll have $1,000 of credit available if you pay off the balance you owe.
Credit cards are a common form of revolving credit. First, a credit card lender approves the card and sets the credit limit. After that, you’re free to use the credit as needed but must make the required payments.
Cash lenders also offer revolving credit line loans. These loans work like credit cards, but you access the cash through the lender when needed.
Interest on Balance
As with any loan type, you must pay interest on the money you owe. Lenders calculate interest by multiplying the rate times your account balance.
What Are the Benefits of Revolving Credit?
People turn to revolving credit lines for many reasons. One of the top reasons is to have access to cash whenever needed. Here are a few other benefits:
You Manage It
When a lender approves a revolving credit line, you manage it. You’ll know your available credit line and can use it when you need cash.
More Time to Repay the Money
You’ll notice a difference with repaying a revolving credit line compared to other loan types. The primary difference is you’ll have more time to repay the money.
You won’t have to make a balloon payment on the credit line. Instead, you make monthly payments until you pay off the balance.
No Need to Apply for Loans Each Time
One of the top reasons to get a revolving credit line is to have access to cash whenever needed.
The best thing is that you won’t have to apply for a new loan each time you need some money. Instead, you can draw from your revolving credit line.
What Is an Installment Loan?
You can best understand installment loans by looking at a car or house loan. You get a car loan when you need cash to buy a car. Then, you make payments to the lender until the balance is zero.
One unique aspect of installment credit lines is they require equal monthly payments. The lender tells you the due date, which is the same every month, and the amount you must pay.
The lender applies the payments to your principal balance. However, they also apply some to the interest they charge for issuing the loan.
Installment loans are one of the most common ways to borrow money for larger purchases. However, you can also use installment loans to borrow money for other purposes, including:
- Unexpected expenses
- Debt consolidation
- Special occasions
So when you get an installment loan, the lender approves the loan and amount. Then, they give you the money, which you repay through equal payments.
What Are the Benefits of Installment Loans?
Installment loans offer several key benefits and are highly versatile. Here are some of the primary benefits:
Budgeting is vital for your finances. Fortunately, you’ll know your payment amount and monthly due date when you take the loan. Thus, you’ll have predictable payments.
Predictable payments make budgeting a breeze, as you’ll know the monthly payment schedule ahead of time.
Known Pay-Off Date
An installment loan comes with a predetermined number of payments. For example, the lender might spread out the repayment schedule over 12 months. You might also have the option of 24 months or more.
The point is you’ll see the light at the end of the tunnel. You can look forward to making the last payment and paying off the debt.
Helps You Build Credit
Installment loans are also helpful for building credit. Get an installment loan and make on-time payments if you want a better credit score.
Making on-time payments helps you build a positive payment history. The result is an increase in your credit score.
Unfortunately, installment loans can also harm a person’s credit. However, this is only the case if you miss payments, as missed payments reduce a person’s credit.
Compare Revolving vs. Installment Debt to Choose the Best Option
Comparing revolving vs. installment debt is the best way to find the right loan for your needs. Borrowing money is a normal part of life. As a result, learning the differences is helpful when you need to take a loan.
Do you need some cash quickly?
Contact us at Tekaloan if you need a loan. We offer fast cash loans, so you’ll get the money quickly once approved.