What is a Revolving Loan?
A revolving loan is a flexible financing tool in which the account holder has the opportunity to borrow money repeatedly within the established limit in dollars but at the same time pay off a part of the current balance in regular payments. The amount available to the account holder increases with each payment. However, borrowers should note that this amount does not include accrued interest and commissions.
Revolving debt can be of different types: subscription loans, credit cards, and equity lines of credit. The most common types of revolving credit are credit cards and personal lines of credit. Credit cards with revolving credit can be unsecured and secured.
Secured Loans
Having a cash deposit supporting a credit card makes this card secured. To open a secure credit card account, you must first deposit money into the card issuer's account. Such an account is an insurance deposit. While the account is open, the credit card issuer holds this deposit.
Unsecured Loans
An unsecured loan has higher interest rates. You don't need any insurance deposit or other collateral to get such a loan. This type of revolving loan is the most popular on the market.
HELOC
If we are discussing secured HELOC loans, the house serves as collateral here. As a rule, the credit limit for such a program is equal to 75% or 80% of the market value of your home. The revolving loan usually includes equity lines of credit and overdraft protection for current accounts. This type of credit has variable interest payments. It remains unchanged as long as the term of the loan is valid.
Line of Credit
By choosing a credit line (LOC) as financial support, you receive a certain borrowing limit, which you can use whenever you see fit. The borrower can get money as needed, as long as the established limit allows it. When repaying the borrowed amount, you can use this tool again if your credit line is open. The main types of credit lines are commercial, personal, and home equity funds. Despite the fact that the main advantage of LOC is their more flexible terms, they also have significant disadvantages. These are primarily high interest rates and penalties for late repayment. In addition, a great inconvenience for credit line users is the possibility of overspending funds provided under their credit line. LOC works like this: you request a certain amount that you can spend whenever it suits you. You pay interest only on the amount you take and not on the entire credit line provided. You can also adjust your payout amounts depending on your budget or your cash flow. For example, you can return the entire outstanding balance immediately, or you can make monthly payments.
Features
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Flexibility. Revolving loans offer flexibility in terms of borrowing and repayment. Borrowers have access to a predetermined credit limit and can choose to borrow funds as needed, up to that limit. They can also repay and borrow again within the set limit, making revolving loans suitable for ongoing or fluctuating financing needs.
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Revolving Credit Line. Unlike traditional loans with a fixed repayment schedule, revolving loans provide a revolving credit line. This means that once borrowers repay the borrowed amount, the funds become available again, allowing for multiple borrowings without the need for reapplying for a new loan.
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Variable Interest Rates. Revolving loans often come with variable interest rates. The interest rates can fluctuate over time based on market conditions or other factors, which may impact the cost of borrowing. It's important for borrowers to understand and consider the potential changes in interest rates when managing their revolving loan.
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Collateral and Security. Depending on the type of revolving loan, collateral or security may be required to secure the credit line. For example, a home equity line of credit (HELOC) uses the borrower's home as collateral. Secured revolving loans typically offer higher credit limits and more favorable terms compared to unsecured revolving loans.
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Minimum Payments. Revolving loans typically require borrowers to make minimum monthly payments based on the outstanding balance. These payments may include interest charges and a portion of the principal amount. Borrowers have the option to pay more than the minimum to reduce the outstanding balance faster.
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Revolving Balance. Revolving loans involve a revolving balance, which refers to the unpaid balance on the credit line that carries over to the next billing cycle. Borrowers can choose to repay the entire balance or make partial payments, subject to the minimum payment requirement.
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Ongoing Access to Funds. One of the primary advantages of revolving loans is the ongoing access to funds. As long as the credit line remains open and the borrower stays within the set limit, they can borrow funds whenever needed without going through additional application processes.
Pros and cons
- Flexibility. Revolving loans offer borrowers flexibility in accessing funds and managing their borrowing and repayment within the credit limit.
- Quick Access to Funds. Borrowers can quickly access funds without the need for reapplying for a new loan, as long as the credit line remains open.
- Interest Payments on Used Amount. Borrowers only pay interest on the amount they have borrowed, potentially saving on interest costs.
- Potential for Higher Credit Limits. Secured revolving loans, like home equity lines of credit, may provide higher credit limits compared to unsecured loans.
- Replenishment of Repaid Amounts. Repaid amounts become available for borrowing again, creating a revolving cycle of available funds.
- Variable Interest Rates. Revolving loans often have variable interest rates, resulting in potential fluctuations in borrowing costs.
- Potential for Overborrowing. The ongoing access to funds can lead to overborrowing if not managed responsibly, potentially causing higher debt levels.
- Minimum Payment Requirements. Borrowers are typically required to make minimum monthly payments, which can increase the financial burden.
- Collateral or Security Requirements. Secured revolving loans may necessitate collateral, putting assets at risk if repayment is not made.
- Temptation to Overspend. The availability of funds through revolving credit lines may tempt borrowers to overspend, potentially leading to financial difficulties.
How to get a Revolving Loan?
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Research Lenders. Start by researching financial institutions, such as banks or credit unions, that offer revolving loans. Look for institutions that have favorable terms, competitive interest rates, and a reputation for reliable lending.
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Determine Eligibility. Review the eligibility criteria set by the lenders. This may include factors such as credit score, income, and any specific requirements they have for the type of revolving loan you are seeking.
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Gather Documentation. Prepare the necessary documentation to support your loan application. This typically includes personal identification, proof of income, employment verification, and financial statements if applying for a business revolving loan.
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Complete Application. Fill out the loan application provided by the chosen lender. Provide accurate and detailed information, ensuring all required fields are completed correctly. Disclose your desired credit limit and any specific terms you are seeking.
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Submit Application and Supporting Documents. Submit the completed application along with the required supporting documents to the lender. This can usually be done online, through email, or by visiting a local branch, depending on the lender's preferred method.
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Underwriting Process. The lender will review your application and documents, thoroughly assessing your creditworthiness and financial stability. This may involve a credit check, income verification, and financial history analysis.
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Approval and Offer. If your application is approved, the lender will provide you with an offer outlining the approved credit limit, interest rate, repayment terms, and any other relevant conditions. Review the offer carefully to ensure it aligns with your needs and financial goals.
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Acceptance and Agreement. If you are satisfied with the terms of the offer, formally accept the loan agreement. Read and understand all terms and conditions before signing the agreement.
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Accessing Funds. Once the loan agreement is signed, the lender will make the approved credit limit available to you. You can access the funds through various means, such as credit cards, checks, or electronic transfers.
Best places to borrow a loan with bad credit
Upgrade
Upgrade is a prominent online lender that offers personal loans to borrowers with bad credit. They provide loan amounts ranging from $1,000 to $50,000, making them suitable for various financial needs. The minimum credit score required by Upgrade is relatively low, typically around 580. This makes it accessible to individuals with a less-than-stellar credit history. One notable advantage of Upgrade is its flexible repayment terms, which can extend up to five years. This longer repayment period allows borrowers to manage their monthly payments more effectively. However, it's worth noting that Upgrade charges origination fees ranging from 2.9% to 8%. Additionally, while they do not have any prepayment penalties, borrowers should be aware of the interest rates, which can be relatively high for individuals with bad credit.
Upstart
Upstart is another online lender that specializes in providing loans to borrowers with bad credit. Their loan amounts range from $1,000 to $50,000, allowing borrowers to access the funds they need for various purposes. Upstart utilizes a unique underwriting model that takes into account factors beyond just credit scores, making it more inclusive for individuals with limited credit history or low credit scores. The minimum credit score required by Upstart is typically around 580. One of the significant advantages of Upstart is its soft credit check, which means that applying for a loan does not negatively impact your credit score. Repayment terms offered by Upstart range from three to five years, providing borrowers with flexibility. While they do charge origination fees of up to 8%, it's important to note that they don't impose any prepayment penalties. However, borrowers with bad credit should expect higher interest rates.
LendingPoint
LendingPoint is a bad credit lender that offers personal loans ranging from $2,000 to $36,500. They consider borrowers with credit scores as low as 585, making them accessible to individuals with bad credit. LendingPoint prides itself on providing fast funding, often disbursing funds within one business day. Their repayment terms typically range from two to four years, allowing borrowers to tailor their loan duration according to their needs. It's important to note that LendingPoint does charge origination fees that can be up to 6%. They also have a slightly higher interest rate compared to traditional lenders, which is to be expected when borrowing with bad credit. However, they do not impose any prepayment penalties, enabling borrowers to pay off their loans early if they desire.
Universal Credit
Universal Credit is an online lender that specializes in bad credit loans, offering loan amounts ranging from $500 to $15,000. Their minimum credit score requirement is relatively low, typically around 550, making them accessible to borrowers with poor credit. Universal Credit offers repayment terms ranging from six months to five years, allowing borrowers to choose a duration that aligns with their financial situation. While they charge origination fees, the amount may vary based on the borrower's creditworthiness. One notable advantage of Universal Credit is its willingness to consider applicants who have previously filed for bankruptcy. However, borrowers should be aware that the interest rates associated with bad credit loans from Universal Credit may be higher compared to traditional lenders.
OneMain Financial
OneMain Financial is a well-established lender that specializes in bad credit loans. They offer loan amounts ranging from $1,500 to $20,000, making them suitable for various financial needs. OneMain Financial requires a minimum credit score of 600, slightly higher than some of the other lenders in this category. However, they have a reputation for considering other factors beyond credit scores when evaluating loan applications. OneMain Financial provides repayment terms that range from two to five years, allowing borrowers to select a term that fits their budget. It's important to note that OneMain Financial charges origination fees, which can vary depending on your residence state. While they do not disclose their interest rates upfront, borrowers with bad credit should expect higher rates.
Avant
Avant is an online lender that specializes in offering personal loans to individuals with bad credit. They provide loan amounts ranging from $2,000 to $35,000, catering to various financial needs. Avant has a minimum credit score requirement of 580, making them accessible to borrowers with less-than-ideal credit histories. Repayment terms offered by Avant typically range from two to five years, giving borrowers flexibility in managing their monthly payments. While Avant charges origination fees up to 4.75%, they do not impose any prepayment penalties. It's important to note that Avant's interest rates can be relatively high for borrowers with bad credit. However, they provide a transparent prequalification process that allows borrowers to check their potential loan offers without affecting their credit scores.
Requirements and conditions
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Creditworthiness. Lenders typically assess your creditworthiness by reviewing your credit score and credit history. A higher credit score increases your chances of approval and may result in more favorable terms.
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Income and Financial Stability. Lenders often consider your income and financial stability to ensure you have the ability to repay the loan. They may request proof of income, such as pay stubs or tax returns.
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Collateral (Secured Loans). Secured revolving loans may require collateral, such as real estate, vehicles, or other valuable assets. Collateral provides security for the lender and can affect the credit limit and interest rates offered.
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Application and Documentation. You will typically need to complete a loan application and provide supporting documents, including identification, proof of income, and any additional documents required by the lender.
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Minimum Credit Limit. Lenders may set a minimum credit limit for revolving loans, ensuring that the loan amount is viable and aligns with their lending policies.
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Interest Rates. Revolving loans can have variable interest rates or fixed rates, depending on the lender and the specific terms of the loan. Depending on market conditions, variable interest rates may change over time while fixed rates remain constant.
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Repayment Terms. The terms of repayment include factors such as the minimum monthly payment, the method of repayment (e.g., automatic debit, online payment), and the length of the repayment period. The repayment terms may vary depending on the lender and the borrower's creditworthiness.
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Fees and Charges. Lenders may impose various fees and charges related to the revolving loan, such as annual, transaction, or late payment fees. Reviewing the fee structure and understanding the potential costs associated with the loan is important.
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Credit Limit Adjustments. Lenders may have the discretion to adjust the credit limit based on factors such as changes in the borrower's financial circumstances, creditworthiness, or overall risk.
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Default and Consequences. Revolving loans come with obligations, and failure to meet those obligations can lead to default. Defaulting on a loan can have severe consequences, including damage to your credit score, additional fees, and potential legal action.
Ways to receive the money
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Credit Card. One common form of revolving loan is a credit card. Borrowers can access funds by using their credit card for purchases or cash advances. The credit card provides a line of credit that can be used up to the approved limit.
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Checks. Some revolving loan accounts come with check-writing privileges. Borrowers can write checks against their credit line, allowing them to access the funds directly.
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Online Transfers. Many lenders provide online banking platforms or mobile apps that allow borrowers to transfer funds from their revolving loan account to their checking or savings account. This enables easy access to the money for various purposes.
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ATM Withdrawals. For credit cards or lines of credit that are linked to an ATM card, borrowers can withdraw cash directly from ATMs using their card and personal identification number (PIN).
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Electronic Funds Transfer (EFT). Lenders may offer electronic funds transfer services, allowing borrowers to electronically transfer money from their revolving loan account to another account. This can be useful for making payments or transferring funds to third parties.
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Merchant Payments. Sometimes, borrowers can authorize payments directly from their revolving loan account to merchants or service providers. This can be done online or over the phone, providing a convenient way to make payments.
Things to pay attention to
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Interest Rates. Understand the interest rates associated with the loan. Determine whether they are fixed or variable, and consider how changes in rates may impact your borrowing costs.
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Fees and Charges. Review the fees and charges associated with the loan, such as annual, transaction, or late payment fees. Be aware of any potential additional costs beyond the interest rate.
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Credit Limit. Consider the approved credit limit and ensure it aligns with your financing needs. Avoid borrowing excessively, as it can lead to financial strain and higher debt levels.
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Repayment Terms. Understand the repayment terms, including minimum monthly payments, payment frequency, and the length of the repayment period. Be confident that you can comfortably meet the repayment obligations.
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Collateral or Security. If the loan is secured, be aware of the collateral or assets required to secure the loan. Understand the implications of potential default and the risk associated with securing the loan against your assets.
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Credit Score Impact. Recognize that borrowing and maintaining a revolving loan can impact your credit score. Ensure that you manage your payments responsibly to avoid negative effects on your creditworthiness.
How to repay a Revolving Loan?
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Minimum Monthly Payments. Make the minimum monthly payments required by the lender. Ensure you meet these payments on time to avoid late fees and penalties.
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Pay More Than the Minimum. Consider paying more than the minimum amount due each month to reduce your outstanding balance faster and save on interest charges.
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Automatic Payments. Set up automatic payments from your bank account to ensure that your loan payments are made on time. This helps avoid missed or late payments.
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Monitor Statements. Regularly review your loan statements to track your repayment progress, check for any discrepancies, and stay informed about your outstanding balance and payment due dates.
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Avoid Overspending. Be mindful of your spending habits to avoid accumulating additional debt while repaying the loan. Stick to your budget and exercise discipline in managing your finances.
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Early Repayment. Consider paying off your revolving loan before the scheduled repayment term if financially feasible. This can save on interest charges and help you become debt-free sooner.
Alternatives
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Term loans provide a lump sum of money that is repaid over a fixed term, typically with regular installments. They are suitable for specific projects or purchases with a defined repayment period.
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Personal loans are unsecured loans that individuals can use for various purposes, such as debt consolidation, home improvements, or major purchases. They have fixed interest rates and fixed repayment terms.
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Business loans are specifically designed to meet the financing needs of businesses. They can be used for various purposes, including startup capital, expansion, equipment purchase, or working capital.
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Invoice financing, also known as accounts receivable financing, allows businesses to access funds based on outstanding invoices. Lenders advance a percentage of the invoice value and collect payment directly from the customers.
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Equipment financing helps businesses acquire machinery, vehicles, or other equipment necessary for operations. The equipment itself serves as collateral for the loan.
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Payday loans are short-term, high-interest loans typically meant to cover emergency expenses until the borrower's next paycheck. However, they come with significantly higher interest rates and should be used with caution due to potential debt traps.
Editorial opinion
In today's fast-paced and ever-changing financial landscape, revolving loans have emerged as a popular and flexible form of financing for individuals and businesses. With their ability to provide quick access to funds and adjustable credit limits, revolving loans offer a unique set of advantages. However, it is crucial to tread cautiously, as the convenience they bring can also become a double-edged sword. At their core, revolving loans empower borrowers with the flexibility to manage their finances according to their specific needs. Whether it's covering unexpected expenses or seizing investment opportunities, the ability to access funds as required can be a game-changer. Moreover, borrowers have the freedom to repay and borrow again within the predetermined credit limit, providing a revolving cycle of available capital that suits their dynamic financial situations. Nonetheless, revolving loans require careful financial discipline and responsibility. The allure of easy access to funds can lead to reckless spending and overborrowing, trapping borrowers in a cycle of mounting debt. Exorbitant interest rates and fees can quickly accumulate if not managed diligently, making it crucial for borrowers to exercise prudent budgeting and repay more than the minimum whenever possible. Furthermore, borrowers should remain vigilant about monitoring their outstanding balances and repayment obligations to avoid late payments and potential damage to their credit scores. Ultimately, revolving loans can be a valuable tool for financial management when used judiciously. The key lies in striking a balance between the convenience they offer and responsible borrowing practices. By understanding the terms and conditions, closely monitoring finances, and committing to timely repayment, individuals and businesses can harness the power of revolving loans to meet their short-term needs while safeguarding their long-term financial well-being.
Important
How to Choose a Lender
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Make sure to confirm whether the lender is licensed to operate in your state. You can verify this information with your state regulator or attorney general.
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Check if the lender is a member of a reputable association, such as the Community Financial Services Association of America. Membership in such organizations may provide an extra level of reliability.
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Carefully review all the terms and conditions of your payday loan contract.
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Thoroughly examine the interest rates on payday loans and ensure that your contract includes a detailed breakdown of the total cost of the loan.
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Take advantage of your right of rescission. Usually, you can rescind the loan within three days after signing the agreement. Alternatively, there is typically a "cooling-off" period, which allows you several days to thoroughly review the contract before making an informed decision to enter into a consumer loan agreement based on the terms specified by the lender.
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Choosing a payday lender is a significant decision that demands careful consideration and a good understanding of how such organizations operate.
Additional Resources
- What Credit Score Do You Need for a Personal Loan?
- How to Get a Personal Loan in 7 Steps
- Personal Loan Pre-Approval
- How to Apply for a Personal Loan
- Personal Loan vs Personal Line of Credit
Sources
- Investopedia. Revolving Loan Facility Explained: How Does It Work? 26.09.2023
- Investopedia. What Is Revolving Credit? What It Is, How It Works, and Examples 26.09.2023
- Experian. What Is Revolving Credit? 26.09.2023
- Equifax. Installment vs. Revolving Credit – Key Differences 26.09.2023