Debt is sometimes categorized in two ways: good and bad. Installment debt is considered to be good debt because it often leads to the acquisition of a necessary and valuable item and is relatively stable. Credit cards, on the other hand, can help with everyday financial needs, but their misuse can lead to increasing debt that causes financial ruin.
You typically take on installment debt to finance a major purchase such as a home or car. You pay back the loan over a predetermined period of time by making regular monthly payments known as installments, and the amount of each installment remains the same for the life of the loan. Credit card debt is also referred to as revolving debt. You can borrow any amount up to your available credit limit, and your monthly payment is based on the size of your outstanding balance at the end of each month.
A major difference between installment debt and credit card debt is that with the former, you know exactly when your debt obligation will end. A mortgage loan may last for 15 or 30 years; a car loan may last for four or five years. With credit cards, there is no finite ending point. Unless you pay the outstanding balance in full at some point, you might even carry the debt until the day you die.
Ease of Obtaining
Credit cards are relatively easy to obtain. College students and others with limited credit histories may qualify for a card. Installment loans, particularly those used to purchase homes and autos, generally require a more stringent application process. The borrower also normally must use the purchased item as collateral, meaning the lender can repossess the item if the borrower defaults on the payments. Although no collateral is needed to acquire a credit card, the cards come with higher interest rates than installment loans.
While credit cards offer flexibility and ease of acquisition, the accompanying debt can be more difficult to manage. Those who cannot avoid the temptation of using their cards to buy all types of goods can quickly find themselves facing a mountain of debt. Some people fall into the trap of paying only the minimum amount due each month while their debt continues to spiral out of control. Installment loans can allow for easier budgeting, because borrowers know how much money they must set aside each month.