What Is A Revolving Loan and How Does it Work?
If you think you’ll have trouble repaying a personal loan, but you still need the extra cash for vital activities, you can choose the more flexible revolving loan.
So, what is a revolving loan? How can it help people borrow money and repay their loans faster?
What is a Revolving Loan?
A revolving loan is a type of loan with a fixed monthly repayment and an interest rate that depends on your financial capability and most recent credit score.
What makes a revolving loan the more amicable option is how it allows you to borrow again even if you haven’t completely paid the existing loan.
This allows you to withdraw, repay, and then borrow again using the debt instrument any number of times until the scheme expires.
You can request for funds again once you’ve repaid a percentage of the borrowed money.
How It Works
A revolving loan isn’t as complex as you think. It functions like a credit card in the sense that you can borrow money again so long as you don’t exceed the limit.
Unlike traditional loans where the borrowed money is given in full, a revolving loan allows you to use only a portion of the borrowed amount as needed. This gives you better control in spending only the manageable amount you can repay.
Monthly repayments are made toward the loan so that the loan limit can be restored to its full capacity.
You can borrow more money within the limit after you’ve repaid a percentage of the loaned amount.
The percentage required will depend on the lender, but it’s usually around 15% to 25% of the borrowed money.
READ ALSO: 10 Best Tips to Avoid Debt in Your Life
Advantages of a Revolving Loan
Now that you know what a revolving loan is, it’s best to know why this is the ideal type of loan in running a business.
- Continuous access to extra funds
After paying the minimum portion of the loan, you can borrow more money so long as you don’t exceed the prescribed limit. The loaned money can be transferred to your transactional account anytime you need it, giving you immediate access to extra cash.
- Better fund management
Since you can decide how much of the loan to access, you can budget the amount to borrow. It’s also up to you to put in bigger repayments and pay the loan quickly to save on interest.
Additionally, a revolving has a fixed monthly repayment scheme which means the amount you repay won’t change regardless of interest changes or the amount you borrow. It doesn’t have a fixed number of installments or a specific timeframe when you need to fully repay the loan. You can also repay more toward the loan anytime you want to.
- Optional debt protection feature
Revolving loan plans often offer debt protection features wherein any outstanding debt on the loan is settled in the advent of death, unemployment, permanent disability, temporary disability, or inability to earn an income.
Just like in applying for other types of loans, creditors offering a revolving loan will investigate your credit history and score. Regularly check your credit report to make sure there are no issues in it that might lead to the rejection of your loan application.
MoneyToday South Africa is a financial website aims to assist consumers with comprehensive information on personal finance, loans, insurance, investment opportunities, financial guides, tips and comparison of a large number of finance and insurance companies on the South African market.