Student loans are considered installment loans, or loans that are repaid through regularly scheduled payments or installments.
Revolving options, like credit cards, let borrowers take out varying amounts of money each month, repay it, and take out more money as they go.
Read on to learn more about student loans, installment loans, and revolving credit — plus how student loans may affect your credit.
Table of Contents
Key Points
• Student loans are installment loans, meaning they are disbursed in a lump sum and repaid in fixed, scheduled payments over time.
• Revolving credit (e.g., credit cards) allows continuous borrowing up to a credit limit, with variable repayment amounts.
• Installment loans offer predictable payments and typically lower interest rates, making them easier to budget for than revolving credit.
• Federal and private student loans are both installment loans, but federal loans generally come with more borrower protections and repayment options.
• Alternative ways to pay for school include grants, scholarships, work-study, personal savings, and federal aid.
What Is Revolving Credit?
Revolving credit is an agreement between a lender and an account holder that allows you to borrow money up to a set maximum amount (or credit limit). The account holder can borrow what they need as they need it (up to their credit limit) and choose to pay off the balance in full or make minimum monthly payments on the account.
As the account holder makes repayments, the amount available to borrow is renewed. Account holders can continue to borrow up to the maximum amount through the term of the agreement. Examples of revolving credit include credit cards and home equity lines of credit (HELOCs).
What Is Installment Credit?
Installment credit is a type of credit that allows a borrower to receive a lump sum loan amount up front, then make fixed payments on the loan over a set period of time. Before the borrower signs an agreement for an installment loan, the lender will decide on the interest rate, fees, and repayment terms, which will determine how much the borrower pays each month.
Common examples of installment loans include federal student loans, private student loans, mortgages, auto loans, and personal loans.
And for borrowers who opt to refinance student loans, those loans are installment loans as well.
Revolving Credit vs Installment Credit
Now that you know student loans are installment and not revolving credit, it’s helpful to understand how these two types of credit compare.
Here’s a high level overview on the differences between installment loans vs. revolving credit.
| Revolving Credit | Installment Credit |
|---|---|
| Account holders can borrow funds at any time (up to a set limit), repay it, and borrow more as needed. | Account holders borrow one lump sum, the sole amount of money they have access to, and repay it over a set time period. |
| May come with higher interest rates than installment credit. | May have stricter lending requirements than some revolving credit options, such as credit cards. |
| Account holders only pay interest on the amount they’ve borrowed at any time, not the total credit limit. | Account holders pay interest on the entire principal amount of the loan from the beginning. |
Revolving Credit
Revolving credit is a more open-ended form of credit obligation. Let’s use the example of a credit card:
1. The cardholder uses the card to make purchases as they please, pays them off either in-full or partially each month, and continues to make charges on the line of credit.
2. The amount of money the cardholder spends is their decision (up to their credit limit), and the amount of money they repay each month isn’t set in advance by the lender.
3. The cardholder can pay off the account balance in full each month, or they can opt to pay the minimum and “revolve” the balance over to the next month (though this will accrue interest on the account).
An important note: To avoid any late fees or potential dings to your credit score, it’s important to pay your monthly revolving bill on time. It’s also wise to keep your balances low, as your credit utilization rate is a major factor in your credit scores.
Installment Credit
Installment credit is less open-ended than revolving credit. Installment credit is a loan that offers a borrower a fixed amount of money over a predetermined period of time. When a borrower signs the loan agreement, they know what the monthly payments will be and how they will need to make payments.
Let’s use the example of a student loan:
1. The student borrows a specific dollar amount. The lender specifies the interest rate and repayment terms. In the case of federal student loans, interest rates and terms are set by federal law.
2. The predetermined loan amount is released to the borrower. Typically, the funds are released in a single lump sum payment.
3. The borrower repays the loan based on the agreed upon terms. Terms will be set by the lender for private student loans, or by law for federal student loans.
An important note: If you only have revolving credit (such as a credit card), taking out an installment loan can diversify your credit mix, which is a factor in determining your credit scores. While an installment loan adds to your total debt, its balance does not factor into your credit utilization ratio (which is specific to revolving credit).
Pros and Cons of Installment Credit
Student loans for undergraduate school, as well as student loans that are refinanced, are considered installment loans, which means they come with a starting balance, are disbursed to the qualifying borrower up front and in full, and are repaid over a set amount of time through a fixed number of payments. There are advantages and disadvantages to taking out an installment loan, and it’s important to be aware of them:
| Pros of Installment Loans | Cons of Installment Loans |
|---|---|
| They can be used to finance a major purchase like a house, car, or college education. | They can come with origination fees (a percentage of the loan amount) |
| They are paid with a set number of payments of the same amount, which can make it easier for budgeting purposes. | Missed or late payments may negatively impact the borrower’s credit score. |
| For some installment loans, it is possible to reduce interest charges by paying the loan off early. | Depending on the type of installment loan and the lender, there may be penalties or fees for paying off the loan early. (Generally, there are no prepayment penalties for paying off student loans early.) |
| They offer the option of paying the loan off over a longer period of time. | Longer terms typically mean you’re paying more in interest over the life of the loan. |
Pros of Installment Credit
Here’s a closer look at two key advantages of installment credit:
Predictable Payments
Installment credit payments are made on a set schedule that’s determined by the lender. This makes them a predictable, long-term strategy for paying off debt, and also makes it easier to factor them into your budget, especially if the installment loan has fixed interest rates.
The monthly payment for an installment loan with a variable interest rate may occasionally change.
Lower Interest Rates
Installment loans often feature lower average interest rates than credit cards or other forms of revolving credit. This can result in significant savings on interest charges over time, especially for large loan amounts.
Cons of Installment Credit
But there are also disadvantages to installment credit. Two key drawbacks include:
Accumulation of Interest
While often lower than credit card rates, interest on an installment loan is paid over the entire life of the loan, which can add up to a significant amount of money over time, particularly for long-term loans.
Prepayment Penalty
Some loans impose prepayment penalties if a borrower pays their loan off early. This isn’t necessarily the case for all installment loans — as mentioned, student loans generally don’t have prepayment penalties. But it’s important to read the fine print in the loan agreement to determine whether a prepayment fee will be triggered if the loan is paid off early.
Recommended: How to Avoid Paying a Prepayment Penalty
How Student Loans Affect Your Credit Score
Student loans, like other loans, are noted on your credit report and they may affect your credit in both positive and negative ways.
On the plus side, making consistent, on-time payments, can help borrowers establish a positive payment history, which is the most significant factor (35%) in a FICO® credit score. Successfully managing an installment loan can also help diversify your credit mix, which can also have a positive impact on your credit profile.
However, failing to make your loan payments can negatively impact your credit. A federal student loan payment is considered delinquent even when your payment is just one day late. After 90 days of missed payments, your loan servicer will report the delinquency to the national credit bureaus. Late payments can stay on your credit report for up to seven years.
(After 270 days of missed payments, your loan will go into default, which can have very serious consequences for your credit and your financial situation in general. If you are having trouble repaying your student loans, reach out to your lender or loan servicer right away to see what your options are.)
If you apply for a private student loan or student loan refinancing, lenders will typically do a hard credit inquiry, which may temporarily lower your credit score. Most federal student loans do not require hard credit inquiries.
Ways to Pay for School
There are a variety of ways to pay for college, including student loans, savings, financial aid, and scholarships. Here’s a closer look at your options:
Federal Student Loans
Federal student loans are installment loans available to students. To apply, students fill out the Free Application for Federal Student Aid (FAFSA®) each year. Federal student loans have fixed interest rates that are set annually by Congress, offer different repayment options, and have some borrower protections and benefits such as deferment and the option to pursue Public Service Loan Forgiveness.
However, there are borrowing limits for federal student loans, and other changes are coming to the federal student loan program as of the summer of 2026, so students may need to review other sources of financing when determining how they’ll pay for college.
Private Student Loans
Private student loans are installment loans you can use to pay for a college education. Private student loans are offered by private lenders. To apply for them, borrowers can browse the offerings of individual lenders like banks, credit unions, and online lenders and decide which private student loan works best for their finances. As a part of the application process, lenders will generally review the applicant’s (or their cosigner’s) credit history and credit score among other factors.
Private student loans can help bridge funding gaps after other sources of financing — such as federal loans, grants, and scholarships — have already been exhausted. This is because private lenders are not required to offer the same borrower protections as federal student loans. If you think private student loans are an option for you, shop around to find competitive terms and interest rates, and be sure to read the terms and fine print closely.
As mentioned, a borrower may choose to refinance private student loans at a later date, especially if they can qualify for more beneficial terms or a lower interest rate. Federal student loans can also be refinanced, but if a borrower chooses this option, they will lose access to federal benefits and protections like federal deferment and forgiveness.
Personal Savings
Using personal savings to pay for college means less debt and more flexibility. Not only that, but it costs significantly more to borrow money to pay for college than it does to use personal savings.
Using personal savings to pay for college means less debt and more flexibility. Using savings also allows you to save money on interest, which can make college less expensive. That said, not everyone has enough savings to cover the full cost of attending college.
Grants
Unlike student loans, which require repayment, grants are a type of financial aid that doesn’t require repayment. Grants are typically based on financial need. Completing the FAFSA will put you in the running for federal, state, and institutional grants.
Recommended: The Differences Between Grants, Scholarships, and Loans
Scholarships
A scholarship is a lump sum of funds that can be used to help a student pay for school. Scholarships usually don’t have to be repaid, and can be need-based or merit-based. You can find out about scholarships through your high school guidance office, college’s financial aid office, or by using an online scholarship search tool.
Work-Study Programs
Federal work-study programs allow students with financial need to work on- or off- campus and earn money through part-time jobs. The program encourages students to do work related to their course of study or community service.
Work-study programs are funded by the federal government. Students may be awarded a certain work-study amount by filling out the FAFSA. Not all schools participate in federal work study, however, so if you are interested in this option, make sure your school offers it.
The Takeaway
Student loans are a common form of installment credit. This means they are dispersed as a lump sum and require making fixed, regular payments over a predetermined period. Unlike revolving credit such as credit cards, student loans offer predictable budgeting and often come with lower interest rates.
Managing student installment loans responsibly can positively impact your credit profile. However, late or missed payments can have serious negative consequences. Understanding the differences between installment and revolving credit, and exploring various funding options for education, can empower you to make informed financial decisions for your academic journey and beyond.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
FAQ
Is a student loan an installment loan?
Yes, a student loan is an installment loan. This means you receive a lump sum of money up front and repay it over a set period with a predetermined number of regular payments.
Is a student loan a revolving loan?
No, a student loan is not a revolving loan. Revolving loans, like credit cards, allow you to borrow varying amounts up to a set credit limit, repay, and then borrow again. Student loans are installment loans, meaning you receive a lump sum and repay it with fixed, scheduled payments over a set period.
What are the benefits of an installment student loan?
The benefits of an installment student loan include predictable payments, which makes budgeting easier, and often lower interest rates compared to revolving credit. They also allow you to finance a major purchase like an education and can help diversify your credit mix.
Can student loans help build credit?
Yes, student loans can help build credit. Making regular, on-time payments on your student loan demonstrates responsible financial behavior, which contributes positively to your payment history — a major factor in your credit score. Successfully managing an installment loan like a student loan can also help diversify your credit mix, which can further enhance your credit profile.
What’s the difference between federal and private student installment loans?
Federal student loans generally offer lower rates and more borrower protections, such as income-driven repayment and potential for loan forgiveness. Also, they typically do not require a hard credit inquiry. Private student loans, offered by banks and other financial institutions, may have fewer borrower protections and repayment options, and usually require a credit check and potentially a cosigner. Interest rates and terms for federal loans are set by law, while private loan terms depend on the lender and borrower’s creditworthiness.
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