Revolving Lines of Credit

Non-banking finance companies (NBFCs) typically extend personal loans as revolving lines of credit via online apps. 

However, the question is whether a revolving line of credit is an alternative to a card or a virtual card and if so, are there regulatory issues with NBFCs providing personal revolving lines of credit?

Let’s delve deeper into what is a line of credit.

What Does A Revolving Line Of Credit Mean?

Wondering about revolving line of credit meaning? Here’s your answer.

A revolving line of credit allows consumers and businesses to borrow continuously from an ongoing line of credit. Once the users repay the borrowed amount, the funds are made available to be borrowed again without having to apply for a new line of credit. 

A revolving line of credit can be used repeatedly as long as the borrower repays the borrowed amount and does not go over the maximum limit. The parameters for determining the limit may be the borrower's creditworthiness, the ratio of assets to liabilities, income, etc.

When the borrower makes a repayment, the credit limit is restored. Depending on the agreement between the lender and the borrower, such a line of credit may be secured or unsecured. 

In case the lender decides not to continue with the line of credit, it becomes a term loan that must be paid down according to the terms of the agreement between the lender and the borrower.

The most common examples of revolving credit are certain types of credit cards and home equity lines of credit. Revolving lines of credit play a major role in determining your credit score.

Keep reading to know the revolving line of credit meaning and the difference between revolving and non-revolving lines of credit. 

When Is The Revolving Line Of Credit Useful? 

A revolving line of credit is ideal for certain types of facilities. Businesses use revolving lines of credit to finance their operations and as working capital. The ability to borrow funds when needed and pay them off at regular intervals allows borrowers flexibility, making revolving lines of credit popular among entrepreneurs. 

Of course, the lender has a standing commitment to providing the facility amount of the limit, for which lenders may charge a continuing commitment charge.

Types Of Revolving Lines Of Credit

Here are some typical types of revolving lines of credit:

While most personal lines of credit are secure, some lenders offer unsecured lines of credit to highly qualified borrowers.

Business lines of credit offer flexibility to companies and help them cover their seasonal expenses, financial growth, and more. 

While several types of revolving lines of credit exist, credit cards stand out. Credit cards are technically revolving lines of credit, but the funds they provide are almost always unsecured (except in the case of secured options). Owing to this, credit cards come with high-interest rates compared to other types of revolving credit lines.

Revolving and Non-Revolving Credit: What’s the Difference?

The main difference between revolving and non-revolving credit accounts is whether they can be used on a recurring basis. However, there are some other significant differences you must be aware of, as well.

Non Revolving credit has an adjustable rate that adjusts based on changes in market rates, whereas revolving credit has a fixed rate. Installment credit is another name for non-revolving credit.

Non Revolving credit typically has the same payment each month.

Non Revolving credit agreements are usually used for one specific purpose, such as purchasing a house or a car. 

It depends on the specifics of your credit account whether it is revolving or non-revolving. Ensure you understand the terms of any credit agreement you enter into.

Conclusion

A revolving line of credit loan allows you to borrow money when in need and pay interest only on the amount you borrow. Once you pay back any of the borrowed amounts before the end of the draw period, you are eligible to borrow that money again. 

A revolving line of credit is a tool for your business to keep up with the needs of its operations or growth when working capital is required and repaid in equal amounts over time. 

You can use revolving credit accounts to help you establish a credit history, improve your credit score, and secure a better financial future.

Revolving Lines of Credit Related FAQs

Ans: A revolving line of credit is a type of lending in which the lender agrees to lend an amount equal to or less than the borrower's predetermined credit limit. The parameters for determining the limit may be the borrower's credit rating, income, etc.

This allows consumers and businesses to borrow continuously from an ongoing line of credit. Once the users repay the borrowed amount, the funds are made available to be borrowed again without having to apply for a new line of credit.


Ans: The similarities between a credit card and a revolving line of credits are – Borrowers can receive disbursements as needed and in both cases, the lender reserves the right to reduce the credit limit.


Ans: A revolving line of credit may be secured or unsecured, whereas, a credit card is almost always unsecured.

Ans: In a line of credit, the end user is restricted by the purpose mentioned in the loan agreement for availing the loan. Of course, the purpose may be generic – for example, personal use or general business use.

Ans: In the case of a line of credit, the disbursements are to be made as and when the borrower requires, therefore, the NBFC should maintain adequate capital and liquidity to meet such abrupt demands.

Internal Links