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Are Student Loans Installment or Revolving?

By LeeMarie Kennedy · March 09, 2022 · 8 minute read

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Are Student Loans Installment or Revolving?

Is a student loan installment or revolving? Student loans are considered installment loans, or loans that are repaid through regularly scheduled payments or installments.

Unlike installment loans (like student loans or mortgages), which let borrowers pay back the money through scheduled payments over time, revolving credit options (like credit cards) let borrowers take out varying amounts of money each month, spend it when they want, repay it, and take out more money as they go.

Learn more about installment loans and revolving credit below.

What Is Revolving Credit?

Revolving credit is an agreement between a lender and an account holder that allows them to borrow money up to a set maximum amount. The account holder can 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 loan. Examples of revolving credit include credit cards and home equity lines of credit (HELOCs).

Recommended: The Different Types Of Home Equity Loans

What Is Installment Credit?

Installment credit is a type of credit that allows a borrower to make fixed payments on a loan over a set period of time. Before the borrower signs the installment loan agreement, 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 student loans, mortgages, auto loans, and personal loans.

Revolving Credit vs Installment Credit

Here’s a high level overview on the differences between revolving credit and installment credit.

Revolving Credit

Installment Credit

Account holders can use the borrowed money at any time, repay it, and borrow more as needed.Account holders borrow one lump sum, it’s the sole amount of money they have access to, and they 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 owe interest on the amount they spend.Account holders owe a fixed number of payments over a predetermined time frame.

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 changes as they please, pays them off either in-full or partially each month, continues to make charges in the meantime, and carries on using the line of credit.

2.    The amount of money the cardholder spends (as long as it’s within their predetermined credit limit) is their decision, 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 their credit score, people who are borrowing from revolving credit are advised to pay their monthly bill on time. Revolving credit can play a major role in calculating a person’s credit utilization rate, which is considered the second biggest factor in determining their credit score. For FICO® scores, it is generally suggested that borrowers use no more than 30% of their available credit.

Installment Credit

Installment credit is a little 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 they sign the loan agreement, the borrower knows exactly what the monthly payments will be and everything is spelled out clearly.

Let’s use the example of a student loan:

1.    The student borrows a specific dollar amount, from there, 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 funds are released to the borrower. Typically, for an installment loan, 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: Having an installment loan on their credit report can help some borrowers diversify their credit mix, which is a factor in determining an individual’s credit score. The amount of the installment loan, however, won’t play a major role in the borrower’s credit utilization rate (versus with revolving credit).

Is a Student Loan an Installment Loan?

When wondering is student loan installment or revolving, student loans for undergraduate school are considered installment loans, which means they come with a starting balance, are disbursed to the qualifying borrower, and are repaid over a set amount of time through a fixed number of payments.

Pros and Cons of Installment Credit

There are both pros and cons to taking out an installment loan:

Pros of Installment Loans

Cons of Installment Loans

Can be used to finance a major purchase like a house, car, or college education.Can come with hefty fees or borrowing more than you actually need.
Is repaid with a set number of payments of the same amount, which can make it easier for budgeting purposes.Missed or 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.
Offers the perk of paying the loan off over a longer period of time.Comes with interest fees, which can stack up over time.

Pros of Installment Credit

Here’s a brief breakdown of a few installment credit pros:

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 change from month to month, depending on how the variable interest rate changes.

Borrowing Cost

In terms of the loan amount and length of the loan, installment loans can be tailored to the borrower’s specific financial circumstances. This means the cost of the installment loan is fairly flexible based on what the borrower needs. Additionally, interest rates are generally lower on installment loans than with revolving credit, so borrowers may find that borrowing an installment loan with a competitive interest rate is a more affordable option.

Cons of Installment Credit

And here’s more info on the cons of installment credit:

Expensive

If the borrower takes out an installment loan over a longer period of time, they may end up making payments at an interest rate that’s higher than the current market rate, unless they’re able to refinance the loan.

Either way, the borrower is locked into a long-term financial contract with an installment loan, and if they have a financial pitfall, they may be unable to make the scheduled payments or risk defaulting on the loan and damaging their credit.

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, 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

Ways to Pay for School

When looking for ways to pay for school, student loans for graduate school or undergraduate school are types of installment loans that are available. Additional costs could be covered by savings accounts, scholarships and grants, and more (below).

Recommended: How to Pay for College

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 flexible repayment options, and have some borrower protections and benefits such as deferment options or the option to pursue Public Service Loan Forgiveness.

However, there are borrowing limits for federal student loans, so students may need to review other sources of financing when determining how they’ll pay for college.

Recommended: FAFSA 101: How to Complete the FAFSA

Private Student Loan

Private student loans are installment loans you can use to pay for a college education. Private student loans vs. federal student loans are not funded by the federal government. To apply for them, borrowers can browse the offerings of individual lenders like banks, credit unions, or 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 applicants credit history and credit score among other factors.

Private student loans can help fill the monetary gap between other payment alternatives like federal loans, grants, and scholarships, but they are generally considered only after all other options have been depleted. 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.

Credit Card

Some (but not all) colleges allow students to pay using a credit card. One way to find out if this is an option is by asking the financial aid or bursar’s office. Be sure to inquire about associated fees.

In most cases, the interest rates on credit cards are higher than student loans, so it’s generally wise to only use them when you’ve exhausted other payment options.

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.

Still, this isn’t financially feasible for everyone, as evidenced by the fact that there are 43.4 million student loan borrowers in the U.S. as of the fourth quarter of 2021. Sometimes, going into debt is the only reasonable option.

Grants

Unlike student loans, which require repayment, or work-study programs, which allow students to work on campus in exchange for money, grants are a type of financial aid that doesn’t require repayment.

Grants may be awarded by the federal government, specific states, or colleges. The amount of aid a student receives depends on a number of factors, such as the student’s financial needs and the type of school or institution they’re attending.

Recommended: The Differences Between Grants, Scholarships, and Loans

Scholarships

A scholarship is a lump sum of funds that can be used to help someone pay for school. The key stipulations with scholarships are that a) they’re contingent on a particular qualification, i.e. a grade point average (GPA), act of service, or athletic performance and b) they never have to be repaid.

Scholarships are usually awarded by specific entities like colleges, universities, corporations or organizations.

The Takeaway

Student loans are installment loans, meaning borrowers receive a set amount of money from a lender and are required to repay the loan over a fixed period of time.

For those looking for ways to pay for college, there are other alternatives to installment student loans — such as scholarships, grants, personal savings, private student loans and, in rare cases, using a credit card.

If you’re in search of a loan for students from a private lender, consider SoFi. SoFi’s private student loans come with no fees and you can apply online in minutes, and easily add a cosigner.

FAQ

Is a student loan an installment loan?

Yes, a student loan is a type of installment loan, which means you pay it back in set amounts, over a fixed period of time, and it shows up on your credit report.

Is a student loan a revolving loan?

No, a student loan is not a revolving loan. It is considered an installment loan.

What are the benefits of an installment student loan?

A few of the benefits of installment student loans include being able to finance major purchases, easily factoring the loan into your monthly budget, the same payment terms for the life of the loan, and a longer period of time to pay off the loan.


Photo credit: iStock/SDI Productions

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