People, when they go to take out a loan, want to know if they should choose an installment loan or if revolving debt is the better option. One thing to consider is the impact each has on a person’s credit score. Having this information may make it easier for the borrower to decide which financial product is right for his or her needs.
Revolving debt is any debt where a person is given an established credit limit. He or she can then borrow up to this limit, and credit cards are a good example of this type of debt. Each month the debtor must make the minimum payment or more. To avoid interest charges, the balance must be paid in full each month. Consumers need to consider the interest rate of the revolving debt and remember that interest compounds. The more time it takes to pay the debt, the more interest the individual pays. Credit cards aren’t backed by an asset, which means they are unsecured. However, any home equity loan is secured by the property. When an individual obtains this type of debt, he or she needs to know whether it is secured or unsecured.
Any loan that is obtained for a specified amount and the funds are distributed in one lump sum is considered installment debt. The borrower can’t borrow more funds from the financial product at any time. The loan comes with an established end date, so borrowers know exactly when the debt will be repaid, and car and mortgage loans are two good examples of this type of financial product. Personal loans may also be installment loans, depending on how the contract is established when the funds are borrowed. Furthermore, installment loans may be secured or unsecured.
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