There are two types of debt—instalment and revolving. Each has advantages and disadvantages.
Instalment debt is a specific amount of money borrowed for a specific purpose and repaid over a set period of time. Personal loans, car loans and leases, and mortgages are examples of instalment debt.
Revolving debt establishes a credit limit and the funds may be used and repaid over and over again. Examples of revolving debt include lines of credit, credit cards, retail cards/accounts and overdraft protection.
The chart below outlines some of the major features of instalment and revolving debt. Please note that this is a general overview—every type of credit has its own features, terms and interest rates.
|Instalment debt||Revolving debt|
|Terms||Terms are set at the time the money is borrowed. The loan amount is set and there is a scheduled payment plan.||A credit limit is set and money can be borrowed up to that limit, repaid, and borrowed again.|
|Interest||Interest rates may be variable or fixed. The interest is set for the term of the loan and is paid back in instalments, along with the principal.||Interest is charged on the outstanding balance each month. Rates tend to be higher than those on loans and mortgages.|
|Payment Structure||Payments are a combination of principal and interest, which ensures the principal amount borrowed is paid down.||A minimum payment is generally required, with the interest being paid first. The minimum payment is usually a percentage of the outstanding balance.|
|Payment amount||Payment amounts are usually set for the term of the loan.||Payment amounts vary from month to month.|
|Prepayment options||Some loans allow for prepayment of the borrowed amount without penalty. Some closed mortgages may have restrictions on the amount that can be prepaid.||The borrowed money may be paid in full at any time.|