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How Do Credit Card Loans Different From Ordinary Installment Loans?

Credit card and installment loans have a lot of similarities. They both involve a consumer borrowing funds that are to be paid back at a later time to the creditor. The primary difference, though, is that credit card loans come with a revolving credit line while installment loans have fixed terms.

Revolving credit means that the line is cyclical. Let’s say you spent $2,000 on your credit card purchases during the last month. The creditor will renew that line of credit as soon as you pay off the debt. Typically, there is a borrowing limit, as well as a minimum payment amount each month.

How to Borrow Money with a Loan

There are a couple of different ways in which borrowers can get money. For instance, they can draw money from an account’s credit, such as when they transfer funds from their checking account or purchase an item. They may also end up using their revolving credit in the form of fees or interest charges.

Installment loans don’t have this same level of flexibility. Instead, creditors will give borrowers a principal amount and then lay out a repayment system. While users can avoid paying interest with timely and complete payments each month, installment loans have interest built into the repayment structure.

Other Considerations

Additionally, revolving credit works indefinitely. Borrowers are likely to use their credit cards regularly. Installment loans have a set start and finish date. Most personal loan providers offer a repayment window from 12 to 84 months.

These monthly payments often have fixed interest rates over the lifetime of the agreement. Conversely, they are significantly less malleable than credit card loans and have stricter qualification requirements as well as harsher prepayment penalties. Additionally, installment loans may require collateral, which is not commonly associated with credit cards.

Writer

Vivaan Marsh is a professional writer, editor and an expert in personal finance. Her career as a professional writer stretch for over 11 years. One of her passions in life is to help everyday families with there financial problems, making their life a bit easier and explaining complicated topics in an easy way. Read more >

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