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What is a revolving loan and how does it work?
Is a revolving loan or personal loan best for you? Here’s what you need to know so you can make an informed decision.
How do you know whether a revolving loan is the right option for you?
Choosing the right credit solution depends on what you need from the credit facility. One of the options available is a revolving loan, which provides you with flexibility but also needs careful management. Here’s what you need to know about these loans to help you make an informed decision.
What is a revolving loan?
A revolving loan is a type of credit facility that offers you the flexibility to:
- make additional repayments at any time; and
- borrow the money you have repaid again without having to reapply for credit once you have repaid a certain percentage of the loan amount (usually 15%) – in other words, you have easy access to your money should you need it.
The loan term is open-ended and the interest payable on the loan facility will be determined by your credit score and affordability (and can change from time to time).
Depending on the specific product, you can generally choose between variable repayments (pay what you use) or fixed repayments that stay the same.
How does it differ from other credit solutions?
A revolving loan is very different from a personal loan. A personal loan involves borrowing a once-off amount that you can’t loan against again. You repay the amount borrowed back via fixed monthly repayments over an agreed term at a set interest rate determined by your credit score.
A revolving loan shares more similarities with a credit card or an overdraft on your bank account, in that you can use it multiple times if you keep up with payments.
This means that if you want continuous access to the money you borrowed, a revolving loan may be better suited to your needs. If you only need a once-off amount for a specific purpose, a personal loan may be the best option for you.
How does it work?
A revolving loan offers ongoing credit as long as you keep up with the minimum payments. The more you pay back on a revolving loan, the more you have available to use again. In that sense it works similar to a savings account – the more you take out, the less you will have to spend, but the more you put in, the more you’ll have access to if, for example, you have an emergency.
Pros and cons of revolving loans
- Pros
- You have ongoing access to credit without having to apply for a new loan.
- The terms are flexible, which means that you can use the funds for whatever you want.
- Cons
- If you don’t manage the loan facility well, you could end up with more debt than you can pay off. This could have a negative impact on your credit score.
- These types of loans generally have a high interest rate, which can make them more costly than other credit solutions.
- If you fall behind on payments the lender could close the account to prevent you from further spending, which could impact your repayment amount.
Speak to a professional financial advisor about your credit needs.
Most of us need to make use of a credit solution in some form to meet our needs and goals. Depending on your requirements and circumstances, and how you generally manage your money, some solutions will be more suitable for you than others. If you think a revolving loan may be appropriate for your needs, we recommend discussing this with an accredited financial advisor before you sign on the dotted line.
Want to know more?
- Contact your wealth manager or private banker.
- To find out more about our banking offering, click here.
- If you're interested in what we can offer you, we would love to hear from you. You can contact us on 0800 111 263, or complete an online contact form.
This information is for general information purposes only and is not legal advice.
