BANKING - LOANS

Installment loans involve the gradual reduction of principal amounts and eventual full repayment, ending the credit cycle.

Perhaps the most distinguishing features of an installment credit account are a predetermined length and an end date, which is sometimes referred to as the term of the loan. The loan agreement usually includes an amortization schedule, in which the principal is gradually reduced through installment payments over the course of several years.

Common installment loans include mortgages, auto loans, student loans and private personal loans. With each of these loans, you generally know how much your monthly payment is and how long you will be making payments. An additional credit application is required to borrow more money.

Installment credit is considered to be less dangerous to your credit score than revolving credit.

Revolving credit is very similar to a credit card. The lending institution grants you a maximum credit limit, which you can use to make purchases at any time and (usually) on any goods. Many small business owners and corporations use revolving credit to finance capital expansion or as a safeguard in the event of cash flow problems.

If you make regular, consistent payments on a revolving credit account, the lender may agree to increase your maximum credit limit – again, like a credit card. There is no set monthly payment with revolving credit accounts, but interest accrues and is capitalized like any other credit. When payments are made on the revolving credit account, those funds become available for borrowing again. The credit limit may be used repeatedly as long as you do not exceed the maximum credit.