Taking on debt is often necessary to purchase items that can improve the quality of life. However, before going into debt, it's important to understand the type of debt you are using to finance your purchase. For many items, you will likely need to incur a form of debt known as non-revolving debt.
With non-revolving debt, you borrow a specific amount of money and pay it back on a predetermined schedule. Non-revolving debt is also known as installment debt because you typically repay it in regular monthly installments featuring a fixed amount. In contrast, revolving debt is more open-ended, as you can replenish, or "revolve," your credit line as you pay back what you've borrowed. Your required minimum monthly payment will vary based on the amount of your outstanding balance. Credit card debt is a common example of revolving debt.
Non-revolving debt is normally used to finance more expensive items that are paid for over a specific time frame. For instance, a home mortgage with a fixed interest rate requires you to pay a regular monthly installment for a time period that could range from 15 to 30 years. With an auto loan, you make set monthly payments that may last three to seven years.
A major advantage of non-revolving debt is that it normally features a lower interest rate than revolving debt. Because non-revolving debt is often secured with collateral, meaning the lender can repossess the item if the borrower defaults on the payments, the lender assumes less of a financial risk. Lenders also tend to scrutinize your credit history more closely before granting approval for non-revolving than with a revolving debt obligation, reducing the chances that you'll take on debt you won't be able to repay.
On the downside, non-revolving debt can limit your financial flexibility, as you are locked into a regular payment schedule. If you want to take on additional debt, you need to apply for a new loan instead of simply asking for an increased line of credit. There's also the risk of losing an essential asset such as your car or home if you fall behind on the payments. The closer scrutiny from lenders also means that non-revolving debt instruments are more difficult to obtain than their revolving counterparts.
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