In the world of finance, borrowing options are vast and varied. Two of the most common types of loans are revolving credit and installment loans. Examples of revolving credit are Credit Cards, Home Equity Lines of Credit and Personal Lines of Credit. And example of installment loans are mortgages, auto Loans and personal loans.
What is Revolving Credit?
Revolving credit is a type of loan that allows borrowers to spend up to a certain limit on an ongoing basis. As you repay the borrowed amount, your available credit replenishes, allowing you to borrow again. This cycle can continue indefinitely as long as you make your payments on time and don’t exceed your credit limit.
What are Examples of Revolving Credit?
The most common examples of revolving credit include:
- Credit Cards: These are the most popular form of revolving credit. According to the Federal Reserve, as of July 2021, the total outstanding revolving credit in the United States was approximately $974.4 billion, most of which is credit card debt.
- Home Equity Lines of Credit (HELOCs): These are secured loans that allow homeowners to borrow against the equity in their homes. They offer a revolving line of credit that can be used for various purposes, such as home improvements or debt consolidation.
- Personal Lines of Credit: These are unsecured loans that provide a set amount of money that can be borrowed as needed. They are typically used for unexpected expenses or to bridge a temporary cash flow shortage.
What is an Installment Loan?
An installment loan is a type of loan where you borrow a specific amount of money and repay it over a set period of time in regular installments. The payments are usually made monthly and include both the principal and the interest. Once the loan is fully repaid, the account is closed.
What are Examples of Installment Loans?
Here are some common examples of installment loans:
- Mortgages: These are loans used to purchase homes. According to the Mortgage Bankers Association, as of the second quarter of 2021, the total outstanding mortgage debt in the United States was approximately $11.04 trillion.
- Auto Loans: These are loans used to purchase vehicles. Experian reports that the average new car loan in the U.S. was $34,635 in the first quarter of 2021.
- Personal Loans: These are loans that can be used for a variety of purposes, such as consolidating debt or paying for a large expense. The loan amount, interest rate, and repayment term are typically fixed.
- Student Loans: These are loans used to pay for education-related expenses. According to the Federal Reserve, as of the second quarter of 2021, the total outstanding student loan debt in the United States was approximately $1.57 trillion.
Understanding the differences between revolving credit and installment loans can help you make informed decisions about your borrowing needs. Whether you need a credit card for everyday purchases, a HELOC for home improvements, or an installment loan for a large purchase, it’s important to choose the right financial tool for your situation.
