Revolving Line Of Credit

What Is A Revolving Line Of Credit?

A revolving line of credit is a kind of loan offered by a financial institution that grants a customer (individual or business) access to a pre-set amount of money. This is known as the credit limit. Provided they keep making regular payments on their current balance at the end of each billing cycle, all or in part.

Once repayment is made, the user can obtain credit up to the dollar limit again without going through the pain of another loan approval process. The revolving line of credit implies a pre-approval, not requiring a credit reevaluation at every instance. However, a balance carried on a revolving account attracts an interest usually higher than the traditional installment loans. This is due to the flexibility and convenience involved.

It generally has no expiration date as an open-end loan, but is typically intended for small or short-term ones, provided the account remains in good standing.

Deeper Definition

In an installment or non-revolving loan, the entire sum is paid out on approval to help meet the customer’s needs, e.g., car purchase, and once the fee is used, it cannot be re-activated. It is expected to have a reasonably long to long maturation period. As such, the lender earns an interest per monthly installment of payment against the principal.

A revolving line of credit, however, attracts interest on the current balance owed. Thus, it is a higher charged interest-rate solution, with rates varying between 5% for Home Equity Line of Credit(HELOC) and 15-18% for credit cards, depending on credit ratings.

Financial institutions consider several factors about a borrower’s ability to pay in setting a credit limit. They include credit score, current income and employment stability for individuals, and income or cash flow statements for companies.

Revolving credit can be secured or unsecured.

A secured line of credit is ensured by collateral, like a home, in the case of HELOC. Or a percentage of company-owned assets. In contrast, unsecured revolving credits are not guaranteed by collateral or assets, e.g., an unsecured credit card. 

Revolving Line Of Credit Example

HELOC: Here, the borrower puts down their home as collateral. They get a loan in the amount of equity on the property.

Personal Line of Credit: The borrower is allowed numerous borrows as long as prompt repayment is guaranteed.