A revolving loan is a sort of credit that does not require reapplication after being approved. As appealing as it may sound, revolving loans, like any other form of borrowing, have advantages and disadvantages. Before we go any further, let us define a revolving loan.
What is a Revolving Loan?
A revolving loan is a type of credit that can be used repeatedly after an initial loan application is approved. Revolving loans typically start from R2,000.00 and have a maximum borrowing limit of R300,000.00. Interest rates vary per lender and can range from 15% to 22.25 %.
This type of credit has limits that can be raised as the holder of a revolving loan makes on-time payments and gains creditworthiness Since the amount of credit can increase, so can the minimum installment amount. Some restrictions may apply to revolving loans, and the loan amount may be reduced if the lender believes the borrower is over-indebted.
Since they remain open over time, revolving loans are referred to as evergreen loans. The amount of money available for borrowing will fluctuate depending on how much the borrower borrows, and monthly payments are required to repay the loan amount.
Characteristics of a Revolving Loan
- Revolving loan interest rates are variable and can change throughout the year.
- The borrower is given the freedom to borrow up to the loan’s maximum amount and at any time.
- Revolving loans require a minimum installment on a monthly basis that is dependent on how much is borrowed.
- After repaying the loan in full or in part, the borrower may borrow additional funds.
- Credit can be extended, and acceptance is contingent on the borrower’s credit history and income level.
Examples of Revolving Loans
Revolving loans come in two forms in South Africa and include a personal line of credit and credit cards.
A personal line of credit
A personal line of credit is an open-ended credit line that allows the borrower to withdraw and make payments from the funds in this account. A personal line of credit comes with a credit limit that cannot be exceeded and requires a minimum repayment per month on the percentage of the credit spent at any given time.
The credit limit on this type of revolving loan ranges from R5,000.00 to R300,000.00. Interest is charged on the amount of credit that has been used at any point in time and interest rates can either be fixed or variable depending on the lender that one uses.
Examples of personal credit lines include:
- Bank overdraft facility.
- Personal revolving loan facility.
- Business revolving loan facility.
A credit card is a short-term finance solution that allows clients to borrow money recurring. Like a personal credit line, a credit card also comes with a credit limit that can be utilized at any given time and minimum repayment per month is set based on the amount of credit that is used.
Credit cards have a higher interest rate than personal credit lines, and the interest rate can reach 22.25 %. A credit card can be used for purchases ranging from R2,000.00 to R300,000.00. The funds can be used without having to repay the entire credit amount all at once.
Examples of credit cards include:
- Store credit cards such as RCS cards,
- Petrol card,
- Bank credit card facility.
How Revolving Loans Work
Depending on the type and purpose of the loan, revolving loans function differently. We examine two critical factors that influence how a revolving loan operates. The two factors will be discussed further below.
Method of transacting
Each type of revolving loan has a different way in which money can be used in the account. Some revolving loans allow for cash withdrawals and some don’t. A revolving loan, for example, may only allow the user to swipe a card or make online purchases. Since this type of credit does not allow the borrower to withdraw cash, funds can only be used to make electronic payments.
Some revolving loans provide a combination of cash access and usage of money online. As a result, with this type of credit, one can make withdrawals at tills and ATMs, transfer money, withdraw money, pay bills, and do other things. Furthermore, not only can a revolving loan provide a hybrid of withdrawals and electronic payments, but a financial institution can provide separate ways to access cash, either cash or electronic use only.
The way in which transactions are made through a revolving loan can impact its use case. How a revolving loan works is mostly dependent on the way money can be used.
Revolving loans require a minimum monthly repayment of the principal balance borrowed plus interest. To gain access to credit, revolving loans typically require a minimum of 3 percent repayment of the total borrowed money or repayment of 15%; however, revolving loan holders can pay more than the stipulated amount to make accelerated repayments on the loan.
Repaying more money has its own benefits, such as receiving lower interest on borrowed funds. It is important to note that interest rates on revolving loans fluctuate and are determined by factors such as credit history, type of account held, and type of transactions made.
Advantages of Revolving Credit
- Credit is available at any time and does not require one to repay the total credit used.
- Since interest rates are personalized, those with good credit can pay low interest on credit.
- Making on-time payments and using a small amount of credit can help you increase your maximum credit limit.
- It has flexible terms and requires a low rate of principal repayment.
Disadvantages of Revolving Credit
- High credit facility utilization can have an impact on your credit score and interest payable.
- Missed payments raise the amount of interest owed.
- Using more than 30% of your credit limit has some consequences for one’s credit score.
Revolving loans are an excellent credit tool that can assist a person in the event of a financial emergency. Since the credit line does not close at some point, revolving loans are one of the most desirable loan products, particularly for businesses whose accounts payable may take longer to settle.