What is Revolving Debt? Online Guide and Explanation


Revolving Debt - Basic Definition

Revolving debt lets you borrow money, as and when you need it. Instead of receiving a large sum of cash at once, as with a traditional loan, you can draw money, pay it back, and repeat the process as long as you don't utilise all of the sanctioned credit limit. These loans come with variable interest rates. When you borrow from revolving debt, the interest applies to the borrowed amount instead of the entire principal amount.

As revolving debt does not come with specific terms and conditions which require you to pay within a limited tenure period - poor management of finances may lead to a debt trap. Revolving debt is a good option if you pay your loan amount back on time, instead of letting it pile up for later.

KEY TAKEAWAYS

  • You can borrow any amount of money up to a preset limit, which is also known as a "credit limit".
  • When you borrow and pay the amount back, that the pre-set total amount is again available for you to withdraw when required. This amount does not include the interest charges and any other fees.
  • Revolving credit is basically a line of credit which remains open when and as you make your payments.
  • Revolving credit lines may either be unsecured or secured.
  • You still have to pay the interest you may have missed on any balance which may be carried over.

How to Access Revolving Debt?

You can use the available funds in the account and pay off your debt multiple times. As you use your credit, your available credit limit will decrease. However, every time you make a payment, your credit limit will increase again. Please keep in mind that any fees and interest charges could also impact your available credit. You will generally be required to make a minimum monthly payment on your revolving credit account. The minimum payment may vary based on your statement balance.

Pros and Cons of Revolving Credit

Pros:

  • You can borrow flexibly, whenever and however many times (within the borrowing limit).
  • There are different types of revolving debts, some of which also offer rewards. For example: You can unlock lucrative rewards by opting for credit cards.
  • There is no time limit within which you must repay the borrowed amount.
  • As the revolving debt can be secured as well as unsecured, you can opt for the option you’re more comfortable with. Secured loans are more advantageous for lenders as they take less risk due to the presence of collateral.

Cons:

  • Revolving debt interest rates may be higher if you have a history of defaults or a poor credit score.
  • Keeping a low credit utilisation ratio should be your top priority as a high rate can heavily impact your credit score for the worse.
  • Revolving debt typically comes with lower borrowing limits compared to other credit types.

Revolving Debt Vs. Instalment Debt

For both, revolving debt and instalment debt - the creditor will refer to the credit score and DTI (debt-to-income ratio). You can pre-qualify for either if you meet the basic eligibility criteria. Revolving debt and instalment debt are both associated with interest rates and other charges. However, they are different in the following ways:

Revolving Debt Instalment Debt
Variable interest rates Fixed interest rates
No specific tenure within which you’re required to pay the debt back Specified tenure within which you must pay your debt back to your creditors
More flexibility in repayment terms Fixed terms of repayment
You can withdraw money, repay it and repeat the process Instalment debts are handed out as a lump sum of money

Final Word

The revolving debt is much more flexible in terms of repayment schedule, number of times you can withdraw money and more, it may be a better option for majority of you. However, keep in mind that you must not let the interest keep piling up to avoid long-term bad debt situations. It is important to have a good credit habit to avoid any debt trap.

Other Words

  • Restructured Loan
  • Refinancing

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