Revolving loans, also known as revolving credit, is a type of credit where you can access credit up to a certain limit over and over again. This is how revolving credit works: you can borrow, pay back, borrow again, it’s a flexible and convenient financial tool for many South Africans. A revolving credit facility, offered by banks and other lenders, has a few key features. These are a monthly service fee which is a fee for maintaining the facility and a once off initiation fee which is a setup cost.
Features
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Credit Utilization Ratio. This is the proportion of the credit you have used compared to the amount available. You need to keep this low to qualify for bigger loans and to keep your finances in good standing.
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Available Credit. This is the amount of credit you have left to spend in your revolving facility. This is calculated by subtracting the amount you have spent from your total loan amount.
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Minimum Payments. These are the smallest amounts you must pay each month to keep your revolving facility active and not to default. But you should pay more than the minimum to pay off your debt faster.
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Revolving Lines and Revolving Facility. These are used interchangeably to refer to a credit account where you can borrow, pay back, borrow again within a certain limit.
Pros and Cons
Pros
Flexibility. Revolving loans offer the flexibility to borrow, repay, and borrow again within the set credit limit. This makes it a convenient option for managing unexpected expenses or making purchases that require a larger amount of money.
Access to Credit. With a revolving facility, you have access to credit when you need it. This can be particularly beneficial for those who need to maintain a steady cash flow for their businesses or personal finances.
Building Credit. If used responsibly, revolving loans can help you build a positive credit history. This can increase your chances of qualifying for larger loans or better interest rates in the future.
Cons
Higher Interest Rates. Revolving loans often come with higher interest rates compared to other types of loans. This can result in higher repayments and more money spent on interest over time.
Debt Trap. The flexibility and ease of access to credit can lead to overspending and accumulation of debt. If not managed properly, a revolving loan can become a debt trap.
Fees and Charges. Revolving facilities often come with various fees and charges, such as a monthly service fee and a once-off initiation fee. These can add up and increase the overall cost of the loan.
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How to Apply for a Revolving Loan?
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Check Your Credit Report. Before applying for a revolving loan, it's a good idea to check your credit report and credit score. This can help you determine whether you're likely to be approved and what interest rate you might be offered.
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Shop Around for the Best Deal. Different financial institutions, such as banks or credit unions, may offer different terms and interest rates on lines of credit. It's a good idea to shop around and compare offers before you apply.
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Gather Your Financial Information. When you apply for a line of credit, you'll typically need to provide information about your income, expenses, and assets. Gathering this information ahead of time can make the application process easier.
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Submit Your Application. Once you've chosen a financial institution and gathered your financial information, you can submit your application. This can typically be done online, over the phone, or in person.
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Wait for Approval. After you've submitted your application, you'll need to wait for approval. The approval process can vary, but it typically involves a credit check and a review of your financial information. If you're approved, you'll typically be able to start accessing money from your line of credit right away.
Requirements and Conditions
Requirements
Credit Check. Lenders will assess your creditworthiness by reviewing your credit history and credit score. A good credit standing increases your chances of approval and can help secure a lower interest rate.
Income Verification. You'll need to provide proof of income, such as payslips or bank statements, to show that you can afford the minimum monthly payments. This helps lenders ensure that you're capable of repaying the loan.
Minimum Credit Score. Different lenders have different minimum credit score requirements. It's always a good idea to check with the lender before you apply. If your score is low, you may want to work on improving it before applying.
Debt-to-Income Ratio (DTI). This is a measure of your monthly debt payments compared to your monthly income. A lower DTI ratio can increase your chances of approval. Lenders often prefer a DTI ratio of 36% or less, but this can vary.
Collateral. For secured revolving loans, such as a home equity line of credit, you'll need to provide collateral. This is an asset, like a house or a car, that the lender can seize if you fail to repay the loan. Unsecured revolving loans, on the other hand, do not require collateral.
Age and Residency. You'll typically need to be at least 18 years old and a resident of South Africa to apply for a revolving loan. Some lenders may have additional age or residency requirements.
Conditions
Credit Limit. The amount you can borrow, up to R500,000, is determined by your financial institution based on your creditworthiness, income, and other factors.
Repayment Period. Once the draw period ends, the repayment period begins. During this time, you must repay any outstanding balance on your revolving loan. The repayment period is revolving.
Interest Rates. Interest rates on revolving loans are personalized and can be variable or fixed and generally go up to 14%.
Ways to Receive the Money
Once your revolving loan has been approved by the financial institution, the funds will typically be paid straight into your bank account. This allows you to access the money easily and use it for your intended purpose, whether it's for major expenses, unexpected costs, or emergency expenses.
Things to Pay Attention To
Minimum Monthly Payment. Be sure to understand the amount of the minimum monthly payment and when it's due. Failing to make the minimum payment can result in late fees and damage to your credit scores.
Interest Rates and Charges. Revolving loans can come with various interest rates and charges, such as a fixed interest rate, variable interest rate, annual fee, or initiation fee. It's important to understand all the costs associated with your credit line so you can make informed decisions about borrowing money.
Credit Utilization. This is the ratio of your outstanding balance to your credit limit. High credit utilization can negatively impact your credit scores, so it's a good idea to keep your outstanding balance well below your credit limit.
Repayment Terms. Understand the terms of your revolving loan, including the length of the draw period, when the repayment period begins, and the repayment schedule. Some financial institutions may also charge prepayment penalties if you repay your credit line in full before the end of the repayment period.
Borrowing Responsibly. Revolving loans can be a helpful financial tool for managing major expenses, unexpected costs, or emergency expenses. However, it's important to borrow money responsibly and only take on debt that you can comfortably repay.
Reasons for Getting Rejected for a Revolving Loan
Poor Credit History or Low Credit Scores. Financial institutions use your credit history and credit scores to assess your creditworthiness. If you have a history of late or missed payments, defaults, or other negative information on your credit report, or if your credit scores are low, you may be denied a revolving loan.
Insufficient Income or Employment Instability. Financial institutions want to be sure that you have the means to repay the borrowed money. If you have a low income, a high debt-to-income ratio, or a history of employment instability, you may be denied a revolving loan.
High Credit Utilization. If you have maxed out your credit card account or other lines of credit, or if you have a high outstanding balance relative to your credit limit, you may be denied a new revolving loan.
Too Many Recent Credit Applications. If you have recently applied for several credit cards, personal loans, or other lines of credit, you may be denied a new revolving loan. Each credit application can result in a hard inquiry on your credit report, which can temporarily lower your credit scores.
Inaccurate or Incomplete Information on Your Application. If you provide inaccurate or incomplete information on your credit line application, or if the financial institution is unable to verify your information, you may be denied a revolving loan. Be sure to double-check your application before submitting it and to provide any additional information that the financial institution requests.
How to Repay a Revolving Loan?
Make Regular Payments. Make at least the minimum monthly payment on your outstanding balance by the due date to avoid late fees and damage to your credit scores.
Pay More Than the Minimum. If possible, pay more than the minimum monthly payment to reduce your outstanding balance and save on interest charges.
Create a Budget. Create a budget that includes your revolving loan payments to ensure that you have the funds available to make your payments on time.
Avoid Taking on More Debt. Try to avoid taking on additional debt while you're repaying your revolving loan. This can help you focus on repaying your outstanding balance and avoid getting into financial trouble.
Consider a Balance Transfer or Consolidation Loan. If you're struggling to repay your revolving loan, consider transferring the balance to a lower-interest credit card or taking out a consolidation loan to simplify your payments and reduce your interest charges.
