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:
-
Credit Cards: Business credit cards are revolving lines of credit, despite the fact that they are not secured. You can pay off the items you charge for your business on your own schedule as long as you make minimum monthly payments.
-
Home Equity Line Of Credit (HELOC): Home Equity Line of Credit (HELOC) is similar to a credit card. This variable-rate loan allows you to borrow a part of the loan amount pre-approved by the bank. The amount you borrowed and the interest rate determine your monthly payments.
-
Personal Line Of Credit: Personal lines of credit bear similarity to HELOC, except that HELOC is secured by a house, while a personal line of credit is secured by assets other than a house.
While most personal lines of credit are secure, some lenders offer unsecured lines of credit to highly qualified borrowers.
-
Business Line Of Credit: Business lines of credit are issued by banks, small business administrations, and alternative lenders. They are the standard type of loans in the industry and the best as well.
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.
-
Open Ended Vs. Closed-Ended: Revolving credit means that the borrower can use the credit line again and again, up to a certain credit limit. Non Revolving credit, on the other hand, allows you to borrow the amount only once.
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.
-
Interest Rates: Because non-revolving credit doesn’t change over time, it’ll likely have a lower interest rate than revolving credit has. Moreover, depending on your balance, your minimum payment might also change with revolving credit.
Non Revolving credit typically has the same payment each month.
-
Payments: Non Revolving credit accounts typically require regular, equal payments over a specified period of time. In some cases, early repayment might incur a penalty.
-
Flexibility: Revolving lines of credit offer you more flexibility. For example, you can use a credit card for a wide variety of purchases.
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.
