Before you borrow money, it is important that you understand all of the parameters of your loan. Taking out a loan can come with a host of complexities, and so you want to ensure that you know what you are undertaking when you borrow money. The two primary groups of loans are revolving loans and installment loans. Each type of loan has key differences that may make it a better choice for your financial needs. Here is the difference between revolving loans and installment loans.
Installment loans generally come with a fixed payment paid at a designated time. Most installment loan payments are paid each month. Banks, credit unions, and online lenders are the most common issuers of installment loans. These loans come in the form of mortgages, personal loans, or vehicle loans. It’s common for installment loans to have fixed interest rates, so you know what your payment will be each month. These types of loans are predictable, giving you a full picture of how long it will take to pay off the debt and what the total cost of the loan will be.
Some installment loan types come with variable interest rates that are tied to various financial indexes. If you choose this route, be sure to educate yourself about how this rate may change based on your qualifications and other factors. Installment loans may be a good choice if you are faced with an unexpected emergency financial situation and don’t have enough in savings to cover the expenses. In these cases, some people consider looking into short-term loans online to help them tackle an unexpected emergency expense.
A revolving loan delivers more flexibility but also with a high level of responsibility. Some of the most common examples of revolving debt are home equity lines of credit and credit cards. When you choose this type of loan, you are awarded a maximum borrowing limit, but you are not obligated to use all of that line of credit. Some types of revolving debt are open ended, meaning that you can borrow and pay back the debt indefinitely. A credit card is a good example of this type of debt. With a revolving loan, you will not know ahead of time what the total cost of borrowing will be to you since it is a fluid type of debt.
Before you make any major financial decisions, you should decide which type of loan is right for your particular situation. This will help to guide your decision when choosing between a revolving or installment loan.
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