The two most common types of debt consumers find themselves in are revolving debt and installment debt, but what are the differences between revolving debt and installment debt, and is one better than the other? As a California bankruptcy attorney, I get asked this question from time to time.
The most common revolving debt is Credit Card Debt. Credit card debt can be the most difficult debt to pay off and get out of for a number of reasons. In that regard, credit card debt is bad debt and really offers no benefit to the consumer. It is typically dischargeable in bankruptcy however. Here are a few of the negative aspects of revolving debt to consider:
1. Compounding Interest. With credit card debt, interest compounds daily, instead of monthly, which in real terms means much more interest, plus your payment is applied mostly to interest instead of principal so it’s very hard to make any real progress on revolving debt;
2. Open Ended Term. Revolving debt has no end in sight, there is no set period of time where if you pay a set amount over so many months, the debt is satisfied, with revolving debt, it can go on forever;
3. No Fixed Interest Rate. Credit card interest rates can change with very little notice, and there’s nothing a consumer can do (except pay off the debt);
4. No Set Monthly Payment. Likewise, the monthly payment can change as well, this makes it hard to budget to pay off the debt;
5. Negative Impact on Credit. Credit bureaus look at revolving debt as a negative, you really get no benefit from revolving debt, even after it’s paid off, but especially not while you have a balance.
Although there really is no “good” consumer debt, there are less negatives to Installment debt. Installment debt is most commonly car loans, home loans and student loans. Many of the negative factors about revolving debt don’t apply to installment debt. Installment debt generally: has a fixed interest rate, has a fixed term, interest compounds monthly, payments go toward both interest and principal, and the credit bureaus view installment debt more favorably (especially after it’s paid off).
CA Bankruptcy Attorney | Orange County Bankruptcy Attorney
Both Revolving Debt and Installment Debt can be discharged in bankruptcy. For Installment debt with collateral, or a government guarantor, there are more details to consider so McFarlin LLP CA bankruptcy attorneys are available to speak to you in much more detail about your specific situation. Our bankruptcy lawyers represent clients in Riverside, Los Angeles, Long Beach, San Bernardino, Anaheim and throughout California. We have office in Irvine or can speak to you on the phone about your situation at no initial charge. We would be more than happy to explain the whole process and analyze your situation. Call us today at (888) 728-0044.