When emergency expenses pop up, you may need help to cover the cost. A personal loan is a popular option many people use when they need to make ends meet. When considering a personal loan, it’s important to do your research on the types of credit available and the lenders. One common question many people have is:
Is a personal loan installment or revolving credit?
Before you borrow, you should understand how this type of loan will work. Because there’s a big difference between installment loans and revolving credit. And a personal loan is one and not the other. Here’s what you need to know.
Is a personal loan installment credit or revolving credit?
A personal loan is one of the most common types of installment credit. This means that the loan is paid back in “installments” over a regularly scheduled period of time. Installment loans may also be known as “term loans” because the period of time in which they are repaid is known as the “term.” Other types of term loans include mortgages, auto loans and student loans.
Revolving credit, on the other hand, is a form of credit that replenishes as you repay. You can then borrow from your credit limit as needed without having to reapply. Popular types of revolving accounts include credit cards and personal lines of credit. Some types of lines of credit can be used for personal expenses, but the term “personal loan” is usually reserved for short-term installment loans.
What is an installment loan?
With an installment (or “term”) loan, a borrower is approved for a lump sum of money and then repays it with interest over a specified period of time. This period is known as the “loan term” and requires payments be made in “installments” on a regular schedule — most often as fixed payments once a month. On each monthly payment’s due date, the borrower can either pay the regularly due fixed amount or more. The length of the repayment period typically depends on the amount of money borrowed and the borrower’s credit history.
The rates and terms for an installment loan will primarily depend on the lender and the borrower’s creditworthiness. Before you borrow, make sure to understand both how an installment loan works and what specific rates and terms the lender is offering.
What is revolving credit?
Revolving credit is a type of personal funding that replenishes as you repay. Examples of revolving credit include credit cards and lines of credit.
With a line of credit, a lender approves you for a credit limit up to a certain amount of money. From that available credit amount, you’re able to withdraw funds. The funds are then sent to your bank account and can be used as cash. As you repay the borrowed money, the funds become available to draw from again.
What can a personal loan be used for?
As the name would suggest, personal loans are used to cover personal expenses. Some of those may include things such as:
- Regular expenses like groceries, bills or rent.
- Emergency expenses like a car or home repair bill.
- Annual expenses such as school fees or holiday gifts.
- Larger loan amounts may be used for debt consolidation or health care expenses.
When it comes to borrowing in the event of an emergency, there are lenders that offer quick loans. Just be sure to read all the terms and conditions before signing a loan agreement so you understand the impact borrowing may have on your personal finances. Consider all of your options before you borrow, but if you need money now a personal loan can help.
What types of personal loans are available for borrowers with bad credit?
If you have less-than-ideal credit, applying for loans can be an intimidating process. However, there are lenders out there who have solutions designed to help.
Personal loans for bad credit can offer longer and more flexible repayment periods than something like a payday loan or title loan. They are installment loans, making it easier to fit your minimum payment into your budget. The alternatives available vary state-by-state and will depend on your lender. You can find payday loan alternatives in states including Kansas, Louisiana, Missouri, South Carolina, Tennessee, Texas, Utah and Wisconsin.
What do lenders consider when you apply for a personal loan?
Lenders may consider the following factors when you apply for a personal installment loan:
- Your personal FICO® credit score and history.
- Total amount of outstanding debts in your credit mix.
- Sometimes your bank account transactions, depending on the lender.
What specifically the lender will consider when you apply for a personal loan also depends on whether they do a “hard” or “soft” credit pull. Some lenders will advertise that they provide “no credit check” loans. The truth is, most lenders will do some type of credit check or at least verify your income and identity before making a decision. What is usually meant with “no credit check” is that a soft pull credit inquiry is made, which will not affect your credit score.
How can I improve my credit score for a personal loan?
Having a good credit score makes it more likely that you’ll qualify for lower interest rates. With a bad credit score, you’ll be stuck with higher interest rates — or may not qualify for funding at all.
To improve your credit score, it’s critical that you make on-time payments. Your payment history is the most important factor on your credit report. The next most important factor is your credit utilization ratio. You want to try to keep your outstanding debt below 30% of your available credit.
Is a personal installment loan better than a payday loan?
Payday loans come with borrowing risks that installment loans do not. However, whether an installment loan is better than a payday loan depends on the borrower’s individual situation and what they’ve qualified for. Generally, a payday loan has a very short repayment period. They are commonly designed to be repaid upon the borrower’s next payday — or within a month or two. This can make payday loans difficult to repay, forcing borrowers to roll them over, which extends the borrowing period and increases the overall interest a borrower will pay.
Installment loans, on the other hand, come with longer repayment terms. Payments are made in small chunks that can better fit a borrower’s budget. The interest rate for a personal installment loan will largely depend on the borrower’s creditworthiness, and borrowers with low credit scores may pay high interest rates for bad credit loans. Sometimes, an installment loan with a lower interest rate can cost more in total interest than a payday loan because you pay interest for a longer amount of time.
What is a home equity line of credit?
A home equity line of credit (HELOC) is a type of line of credit that lets homeowners borrow against the equity they’ve built in their property. It works similarly to a normal line of credit — if approved, you’ll be given a set credit limit that you can borrow against. There are also home equity loans that allow you to borrow a lump sum and repay it over time. Many people use these options to help with large costs such as home renovations.
Keep in mind that HELOCs and home equity loans use your home equity as collateral. This means missing payments could put your equity — or even your home — at risk. Additionally, some HELOCs may have a variable interest rate, meaning your payments could fluctuate. As with any financial decision, you should do research and carefully consider your unique situation before choosing which option is right for you.
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Personal loans can be a great tool for navigating many different financial situations. Because they’re a type of installment loan, they can offer predictable payments that make them easier to fit into your budget. Whether you need fast cash in an emergency or a manageable way to consolidate credit card debt, a personal loan can help. Be sure to do your research before signing any loan agreement and make sure you understand the terms and conditions. You may also want to consider talking with a financial professional who can offer advice and help you figure out what option is right for you.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
