Have you decided to take out a loan? At this point you probably already know that it is more complex than it seems; first of all, not all credits work the same. Your first step before taking action should be to know more about the different types of credit. Because this will help you make good decisions about your finances.

This article tells you about the different types of credit and which one can best serve your goals. Keep reading!

Revolving Credit

Revolving credit is credit that can be used repeatedly. The bank authorizes an amount called a line of credit each month, which cannot be exceeded. If you pay the credit you have used on time, that credit is reinstalled and updated as your payment is applied. It is ideal if you are able to pay on time. If this does not happen the interest will be higher.

An example of a revolving credit is a credit card. With your card you have access to the line of credit up to the limit that has been established. Another example of revolving credit are the lines of credit granted by banks to SMEs, which work in the same way; a line of credit is granted, and when the payment is made within the established term, it is renewed.

Mrs. X activates her new credit card and is granted a credit limit of $30,000; and purchases a $10,000 jewellery with the card, so her line of credit reduces to $20,000. However, if she pays off the balance before the start of the next payment cycle, the entire credit line will be back into her card account, so she can use it again without paying interest.

Read this: Best options for credit card debt settlement

Installment Loan

An installment loan is an amount of money that a consumer borrows from a credit institution to finance a purchase – such as a house, car, repairs or travel – committing to repay the total amount of the same plus interest, usually through a series of monthly installments (installments). The loans are usually for a certain amount and term, which cannot be modified unless the borrower submits a request for their extension. The amount of this unsecured loan varies for each individual and is at the sole discretion of the bank.

Example: The bank grants a loan of $10,000 to be repaid in 3 years at an interest rate of 7% through monthly installments.

This implies that, the bank deposits $10,000 into the account of the borrower and this amount becomes a debt. Borrower will pay it back through the monthly installments during the 3 years as per the agreement in addition to the interest of 7%.

At the end of the three-year term, when the entire loan is repaid, borrower will not have any debt with the bank.

There is also a possibility of early repayment with or without commission. In the case of pre-payment, if the debt is paid in full at any given time at that time the contract will end.

Check out: How to pay less on personal loan

Are you paying too much for a loan?

It is highly recommended to pay your loan plus interest on time in case you plan to renew the credit. It is also advised that, if you have an installment loan offered by any financial institution/lender, investigate how the payment process works, to see if they apply the unpaid balances, for which some financial reward you by assigning you a better interest to pay in advance.

If you have a loan pay well on time or in advance, you can have a very good impact:

• Good credit score
• Ease in getting fresh credit
• Lower interest rate
• Meet your goals

Author Bio:

Hi, I am Nikesh Mehta owner and writer of this site.

I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business.

I can be reached at nikeshmehta@allonmoney.com. You may also visit my LinkedIn profile.