Revolving credit vs. installment credit: what's the difference?
About this video
The video compares two broad kinds of loans. Installment credit means borrowing one large amount, like a car loan, student loan or mortgage, and paying it back in fixed installments. Revolving credit, like a credit card or a personal line of credit, gives you a limit you can borrow up to, pay back and borrow again.
You'll be able to
- explain the difference between installment credit and revolving credit.
- give examples of each type of loan.
- work out how much more I can borrow on revolving credit after spending some of my limit.
Key words
- installment loan
- A loan where you borrow one usually large amount and pay it back in regular, usually fixed payments.
- revolving credit
- Credit with a limit that you can borrow from, pay back, and borrow from again.
- credit limit
- The most a lender lets you borrow at one time on revolving credit, such as a credit card.
- mortgage
- A loan used to buy a house, usually paid back over 10 to 30 years.
- line of credit
- A bank arrangement that lets you borrow and repay money up to a set limit, sometimes based on the value of your house.
Transcript
- So let's talk about two very broad categories of loans. One is installment loans and one is revolving loans or revolving credit. So if we're talking about installment loans or installment credit, that's a situation where you're borrowing one usually large amount of money and then you're paying it back in installments.
The most common examples of this are a car loan, your student debt payment, or a mortgage where you might say, borrow a hundred thousand dollars. And then you're paying it down over 10, 15, 30 years where you're paying usually a fixed amount every year to pay down how much you borrowed, plus paying the interest.
Now, the other end of the spectrum, or the other category I should say, is revolving credit or revolving loans. And the one most common to or most familiar to most people is your credit card. You don't call that necessarily revolving credit but that's what it is.
What that means is there's some limit that you can borrow that the credit card issuer says, all right I'll lend you up to a thousand dollars. That's your credit card limit, and you can use it as long as you spend less than a thousand dollars. And then you can pay it down and then you can use some more, et cetera, et cetera.
So let's say you have a thousand dollars credit card limit and right now you have not borrowed or you haven't used it at all. Then you go out, you spend $50 on clothing. Now you owe the credit card company the issuer $50 and you could borrow an extra $950 from them 'cause you've used $50 of that thousand dollars.
Now you could pay that down and I highly recommend paying it down as quickly as possible. You could pay down that $50 and now you could borrow up to a thousand dollars. So that's why it's called revolving. You're constantly using some of it and then paying some of it back, using some of it, paying some of it back.
That's the most common example in most people's lives. There's also things like personal lines of credit that you might be able to get from a bank. Sometimes they'll lend you that based on the value that you have in your house, where you can borrow money and then pay it back, borrow money and pay it back up to some type of a limit.
So those are the two big categories. It's nice to have a little category knowledge in your head about how they might different, how they might be different. One is usually one large lump sum purchase that you're borrowing money for, and then you're paying it back in, usually fixed installments.
The other is you have some kind of a credit limit and you can borrow and pay back, borrow and pay back depending on what your needs are in life.
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