What is a revolving line of credit?
A revolving line of credit is a type of loan provided by a financial institution. The debt is paid as any other loan. With a revolving credit line, once the debt has been repaid, the borrower can borrow up to her credit limit yet again, without having to go through another loan approval process.
The entire amount is paid at approval. This is because the customer must use the loan immediately to pay for something, such as a house or car. Once the money has been used, it cannot be used again. The loan is not expected to be paid off anytime soon so the lender earns interest each month the borrower makes a payment on her principal.
A revolving credit (also known as open-end credit) allows customers to make purchases up to a certain limit. Revolving credit is often associated with financial instruments such as credit cards and home equity loans (HELOCs). These lines of credit allow customers to purchase items even if they don’t have immediate cash.
As long as credit is available, the customer can use credit for purchases. Each billing cycle can be used to free credit by making required payments.
The lender expects that any unpaid balance will be paid off every billing cycle, unlike non-revolving loans. The lender is entitled to collect late fees and interest on unpaid balances at very high rates. In certain cases, collateral can secure the revolving credit line.
Revolving credit lines can be rewarded if accessed using, a points-earning card.
Revolving line of credit examples
Three common types of revolving credit lines are:
- Home equity. A HELOC allows the borrower to receive a loan up to the equity in her home and then puts her home as collateral. As long as she repays the loan on time, she can continue to borrow from that credit line.
- Personal credit. Personal credit allows the customer to borrow as much as she wants, provided she pays her balance. While lenders may require extensive documentation to approve someone, personal lines of credit have stricter restrictions like cash advances.
- Credit cards. Credit cards are simply an instrument that allows you to access a revolving credit line issued by a financial institution. All purchases are taken from the credit limit stated and must be repaid at the end of each billing cycle.