Revolving Line 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 credit card or a virtual card, and if so, are there regulatory issues with NBFCs providing personal revolving lines of credit?

Let’s delve deeper to find out what a line of credit is.

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 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 exceed the maximum limit. The parameters for determining the limit may be the borrower's creditworthiness, the ratio of assets to liabilities, income, etc.

Depending on the agreement, 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.

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. 

How Does Revolving Line of Credit Work?

When you get approved for revolving credit, you get a credit limit that can be used over and over again, all or in part. Credit limit refers to the maximum amount of funds the bank or financial institution is willing to give you. There is no expiration date on credit limits.

If you maintain the account properly, you can keep using it, and the lender might also increase the limit. To understand credit limits in detail, let’s look at the two parts it is divided into -

• Draw Period

This period refers to when you borrow money from your available line of credit. You will be paying monthly interest only after you borrow an amount. If you pay a part of the principal amount, it will again be available for you to borrow. 

The duration of this period varies from lender to lender. When it ends, the lender might renew your line of credit or extend the draw period.

• Repayment Period

Once the draw period ends, the loan enters the repayment period. If the loan is not extended, you have to repay the loan in full during this period. 

You would have to repay the loan through fixed monthly installments which will consist of both the interest and the principal.

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.

Pros and Cons of Revolving Line of Credit

Now that we have covered the basics of a revolving line of credit, let’s look at its advantages and disadvantages. Here is how a revolving line of credit can be beneficial for you -

• You have quick access to funds when you need it

• Lower interest rates as compared to other loan types

• You pay interest for only the amount you borrow

• Once you pay off the principal, it is available to be borrowed again

• Some of the disadvantages of a revolving line of credit are listed below -

• It can become a burden if not managed properly

• Credit utilization ratio can be negatively affected if you borrow too much

• Unsecured lines of credit have higher interest rates

• Once the draw period ends, you need to either renew the loan or pay it back in full

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 schedule as long as you make minimum monthly payments.

• Home Equity Line of Credit (HELOC)

A 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

A personal line of credit is secured by assets other than a house. They are similar to HELOCs, except for the fact that a HELOC is secured by a house.

Some highly qualified borrowers might also get unsecured personal lines of credit.

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

Once you have read about revolving credit, you must be wondering how is it different from non-revolving credit. Let us try to understand the differences between the two -

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.