Installment Loans vs. Revolving Credit

An installment loan is a loan you pay back over a set period. Borrowers receive the entire lump sum and repay the loan in scheduled payments. The repayment terms can be a few months to a few years. You can be charged a fixed or variable interest rate and other fees.

You can only borrow money from an installment loan once, and you’ll need to apply for a new loan if you need more money. Lenders will consider credit history, outstanding debt, credit scores, and other factors when extending an installment loan.

Installment loan examples

Installment loans are a popular way to finance big-ticket items like houses or cars.

The most common installment loan types include:

Impact on credit score

Making consistent on-time payments toward your installment loans can help strengthen your credit score. Payment history is a huge factor in determining your credit score, so making timely payments can help your credit. And it can help increase your credit mix, which considers the different types of accounts you own.

However, an installment loan might not positively impact your credit score immediately; in some cases, it could lower your score. Maintaining on-time payments can help mitigate those effects.

Installment loan pros and cons

Pros Cons
More flexible terms and lower interest rates than revolving credit. Can have strict eligibility requirements.
Can be used for large expenses. Fees and penalties can be high.
Repayment is straightforward and at the same time each month. Can take a while to pay off.
Can potentially raise your credit score. If you need more funds after you spend the initial loan amount, you’ll need to apply for a new loan.

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