A revolving loan is a permanently available credit line connected to your personal account. A revolving loan can be used for any purpose. We use the funds available under it in the same way as we use our own money accumulated on the account
Revolving loan – what is it?
A revolving loan is a type of working capital loan. It is associated with a personal invoice, which is why it is often identified with overdraft. Meanwhile, these are two different financial products.
A revolving loan is also known as a revolving or credit limit. Its main task is to increase the funds available on the account by a certain amount. For example, if the account holder has $ 2,000 on it and uses a revolving loan with a limit of $ 1,000, he can finally have $ 3,000.
Such credit by banks is treated as an additional service that is offered to every personal account holder. The only condition we must meet to be able to apply for it is a good credit history and income that will be enough to repay the limit granted.
Renewable loan – how does it work and how does it work?
The account owner first uses his funds, and when they run out, he reaches for the money available under the revolving loan. This renews every time we pay off our debt. Usually, repayment is automatic, which means that when funds appear on our account, the bank will collect the amount of debt itself.Thanks to this, we will be able to use the loan again.
To enter into a revolving loan agreement, we must provide proof of income, although some banks do not require it. You have to wait about a few days for the funds allocated under it.
The contract is valid for 12 months. We can use the funds available under the revolving loan for one year (provided that we repay our debt). The said agreement, unless we terminate it, is automatically extended for another 12 months. This happens when we have “free funds” on our account and when we have already used the limit granted by law. If we want to cancel a revolving loan, we must inform the bank about it and terminate the previously concluded agreement.
We use the funds available within the limit exactly as we do those already in our account. We can make transfers, withdraw cash at ATMs, pay by card in stores, service outlets and on the Internet. The only condition is that the upper limit imposed by the bank is not exceeded.
Revolving loan – who can get it?
Who gets the revolving loan depends on the policy of the bank. However, the general conditions we must meet to receive it are similar. The following may apply for a revolving loan:
- individual customers with a personal account, Polish citizenship and permanent address in Poland
- individual customers who have a personal account that is foreigners, as long as they are employed by an entity based in the Republic of Poland or if they receive a scholarship or pension
- people with stable regular income
- customers who have had an account in a given bank for at least 3 months (in the case of regular receipts) or for 6 months (if the inflow to the account is less frequent)
- private entities with adequate creditworthiness
- people who did not have an overdraft within 3 months before submitting the application.
A revolving loan can be granted to an account that we share with another person. The contract is then concluded by both account owners. Their creditworthiness is also examined. In most banks, we also have the option of transferring a revolving loan from another branch (along with the entire history of the account).
Revolving loan and debit
A revolving loan is often mistaken for an overdraft. Wrongly, they are two separate financial products. What is the difference? First of all – formalities. To be able to use a revolving loan, you must submit an appropriate application and sign a contract with the bank.In the case of overdraft, such formalities are not necessary.
Another difference concerns the amount of financial support provided. When applying for a revolving loan, we can count on the amount from $ 500 to even $ 150,000. If we use overdraft this amount will be much lower.
Let us remember that whether a revolving loan will be granted to us depends on our creditworthiness. However, what resources we will be able to dispose of is related to the amount of our income. Usually, the amount of credit limit granted is 6-8 times your earnings. People with a short account history will receive a lower amount than those who have long been a customer of the bank. At any time, however, we can submit a request to increase the limit granted.
Revolving loan – advantages and disadvantages
We can reach for such an injection of cash on attractive terms when we need additional funds. Of course, provided that we pay our debts on time.This is a useful solution, especially if we could use a higher amount than the one available under overdraft.
The advantage of a revolving loan is the relatively low interest rate and the fact that we only pay with the funds that we actually use. It is therefore an alternative to loans and advances offered by banks and private companies, which usually involve considerable costs.
Another advantage is that we can use it for any purpose. In addition, we can use the funds available many times.This is because each repayment reduces the amount of debt and allows you to dispose of those funds that you have already repaid and the remaining part of the loan to use.
The biggest downside is that we can fall into a debt spiral. How to use a revolving loan so that it is support for us and not a financial trap?
First of all, use it wisely and do not spend more than we can return. Remember that the funds allocated belong to the bank, which means that sooner or later we will have to give them back. You should also be careful not to get used to “living on credit”. How to do it? Planning your home budget and recording your income and expenses will help us. It is also important to learn how to save money. Here we have many possibilities: we can save on purchases, choose cheaper suppliers of some services, do not buy anything on impulse, compare prices in stores, etc. A revolving loan does not free us from thinking and from having to manage our finances.
Revolving loan – how much does it cost?
How much we pay for the financial support provided depends on the particular bank and its lending policy. In most cases, the interest rate is 10% per annum, which is less than 1% per month. For example: if we spend $ 1,000, the interest accrued by the bank will amount to less than $ 9. Importantly, we pay interest on the revolving loan not on the entire amount granted within the limit, but on the funds used. If our renewable limit is $ 8,000 and we use only $ 4,000, the bank will charge us interest only on this amount.
Revolving loan – summary
When launching a revolving loan, we decide how we will use the allocated funds. It is also up to us to decide how and when we will pay back our debt. The final repayment must be made within one year of the contract being signed.