Installment Vs Revolving Credit – The Difference in Time and Interest

The legal obligations of the parties to a credit transaction are defined in the credit agreement. In general, those agreements are one of two types: an installment or a revolving credit agreement.

Installment credit: these agreements typically define a one-time transaction, for a specific loan amount and interest rate that the borrower repays in scheduled payments for a set term. Payments are amortized so that the borrower pays equal payments over the life of the loan. As payments decrease the balance owed, the borrower cannot secure additional funds through that same credit agreement, for instance, up to the original loan value. Most secure debt, such as a home mortgage or auto loan, are transacted through an installment credit agreement.

Revolving credit: the term of a revolving credit agreement is not fixed; the borrow is only required to make a minimum payment each payment period. The borrower can also execute multiple transactions through a single agreement, as long as the total outstanding debt under the agreement does not exceed the available credit limit authorized by the lender. Credit cards are the most popular example of revolving credit agreements.

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