Revolving Loan Facility
A revolving loan facility is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations. It is not considered a term loan because, during an allotted period of time, the facility allows the borrower to repay the loan or take it out again. In contrast, a term loan provides a borrower with funds followed by a fixed payment schedule.
Definition: A revolving loan is a type of credit issued by financial institutions that allows borrowers to withdraw, repay, and re-borrow funds. Due to its repayment and re-borrowing convenience, a revolving loan is considered a flexible financing tool. It is not regarded as a term loan because, within a specified period, the loan allows borrowers to repay or re-draw funds. In contrast, a term loan provides borrowers with funds followed by a fixed repayment schedule.
Origin: The concept of revolving loans originated in the early 20th century as the banking industry developed and the demand for personal credit increased. The earliest forms of revolving loans can be traced back to the advent of credit cards, which gradually evolved and expanded into other types of credit products.
Categories and Characteristics: Revolving loans mainly fall into two categories: credit cards and lines of credit.
- Credit Cards: Credit cards are the most common form of revolving loans, allowing cardholders to make purchases within a credit limit and choose to pay off the balance in full or in part at the end of the billing cycle.
- Lines of Credit: A line of credit is a pre-approved loan amount that borrowers can draw from as needed and re-draw after repayment.
- Flexibility: Borrowers can withdraw and repay funds as needed.
- Revolving Use: After repayment, borrowers can reuse the same loan amount.
- Interest Calculation: Interest is usually calculated on the outstanding balance, not the entire loan amount.
Specific Cases:
- Case 1: Xiao Ming has a credit card with a credit limit of 10,000 yuan. He spent 5,000 yuan in one month and repaid 3,000 yuan on the billing date. Next month, he can continue to use the remaining 2,000 yuan limit and reuse the 10,000 yuan credit limit after repaying the debt.
- Case 2: Xiao Hong applied for a revolving loan with a credit limit of 50,000 yuan for home renovation. She withdrew a total of 30,000 yuan in multiple installments during the renovation and repaid it in installments over six months. After repayment, she can withdraw the remaining 20,000 yuan limit for other purposes.
Common Questions:
- How is the interest on a revolving loan calculated? The interest on a revolving loan is usually calculated on the outstanding balance, not the entire loan amount.
- What is the difference between a revolving loan and a term loan? A revolving loan allows borrowers to withdraw and repay funds multiple times within a specified period, while a term loan has a fixed repayment schedule and term.
- Is a revolving loan suitable for everyone? A revolving loan is suitable for borrowers who need flexible fund management but not for those who cannot control their spending or have weak repayment abilities.
