Comparing Revolving and Non-Revolving Credit

Non revolving credit is typically in the form of an installment loan, which is a loan paid off with regular monthly payments. An installment loan is given in a lump principal sum. The sum is paid back over time with interest additionally assessed. Non revolving credit is commonly found in home loans, car loans and business loans. Revolving credit, on the other hand, is found with credit cards and home equity lines of credit.

How Interest Is Assessed on Non Revolving Credit

Interest is set as either a fixed or adjustable rate on non revolving credit. This interest is assessed each month at the going rate, and the interest is paid off each month with a monthly installment. Adjustable rates on non revolving credit do not typically fluctuate month to month, but they may go up or down year by year. Revolving credit, on the other hand, is almost always adjustable. There is interest charged on each purchase. If the funds are not paid down at the end of the month, then the interest will compound the next month. This makes interest rates on revolving credit higher on average.

How Payments Are Scheduled on Non Revolving Credit

Non revolving credit loans have set payments each month. The borrower agrees to these payments when the loan is signed, and the only way to change them is through a loan modification in the future. The payments stay stable over the years the loan is active unless the interest rates adjust higher. Revolving lines have a very low monthly payment to be made to keep the credit active. Beyond this payment, the borrower gets to decide how much to pay down each month. If a borrower pays down the total sum each month, then no interest will compound over time.

Advantages of Non Revolving Credit

The main advantage of non revolving credit is the lower amount spent on interest. Borrowers who elect non revolving lines will also have a better idea of what their total financing costs will be over time. In fact, they will know the moment they sign the loan documents exactly how much the loan will cost them. A revolving line, on the other hand, is much less certain. When a borrower opens a credit card or credit line, he or she has no idea how much of the credit will be used, paid off or owed at any given time. Because of this, the borrower cannot know how much the credit line will cost upfront.

Shortcomings of Non Revolving Credit

It may seem smart to open a non revolving credit line to save money, but the major setback for this type of loan is its lack of flexibility. A borrower will have to, under penalty of breaking a contract, make the monthly payment each month. Even if the borrower has another financial emergency, the minimum payment must be met. Further, it is not possible to expand the size of the loan in the future. This loan will only work if a borrower knows a number of factors and needs up front.

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