Revolving Credit vs Line of Credit
By Paris, Updated: 2023-03-13 (published on 2022-10-29)
Both revolving credits, as well as a line of credit, are two different types of financial arrangements that offer more flexibility in comparison to traditional loans. They both work the same way as you are offered a credit amount and as you make purchases, the purchasing power is reduced depending upon how much was spent. Then, as you clear the credit, the amount is available for use again. Interest for both is charged only on the amount used. Although the two are pretty similar in concept, they have some differences. Here’s detailed information on revolving credit vs line of credit and How do Lines of Credit Differ From Traditional Loans?
Revolving credit as the name suggests will have a revolving scheme of loan and the arrangement remains open until either the lender or borrower decides to close the account. The revolving credit can be used by the borrowers and repaid time and again up to a certain credit limit. On the other hand, a ‘line of credit, is a one-time financial arrangement where the lender closes the account once the set amount of credit is spent by the borrower.
What is revolving credit?
Revolving credit is an open-ended credit account that can be used and paid repeatedly for as long as the account is open. They do not have an end date and can be used as long as it is open. After the approval of a revolving credit account, a credit limit is issued by a lender, and the borrower is assigned a specific credit limit that is based on numerous factors such as a borrower’s income, credit history, and others. Credit limit here means the maximum amount that can be charged to that account.
After an account has been successfully set up, the borrower can continue reusing it within the credit limit as per their wishes. The more you use the less available credit you will have and whenever you make a payment, the available credit goes back up again, and you can borrow it again too. Hence, your minimum payment could vary from month to month as it is usually calculated based on how much a borrower owes at the time. As long as the credit limit is not exceeded, it can be used repeatedly. This type of account remains open until either one of the parties decides to close it.
In businesses, revolving credit is often used by owners to finance capital expansion or as a safeguard to prevent cash flow problems that can arise in the future. Personally, it is used by individuals to make purchases, cover expenses, and others.
A commonly used form of revolving credit is credit cards, borrowers are given a credit limit of how much they can spend on their card and once the due amount is cleared, they can use the same card to make other further payments.
What is a line of credit?
Non-revolving line of credit has similar features to revolving credit. There is a set credit limit in the line of credit as well and the funds can be used for various purposes. However here, when the credit is paid back, it does not top up after the repayment is made. In a non-revolving line of credit when the owed amount is paid off in full, the account gets closed, and it can no longer be used for any further transactions.
A personal line of credit in the form of an overdraft protection plan which is offered by banks is an example of a non-revolving line of credit. Customers can have an overdraft plan linked to their accounts. Here, if a customer’s balance goes below zero, the overdraft protection keeps customers safe from having their purchase declined or cheques bounced. Overdrafts however do have to be paid back with interest.
How do Lines of Credit Differ From Traditional Loans?
Revolving credit, as well as lines of credit, are both quite different from traditional loans. Most forms of loans such as auto loans, student loans, or mortgages have specific purposes for using lent money, and they must be disclosed ahead of time. Revolving credit and line of credit payments are usually more irregular with regard to this.
Further, unlike with a loan, you do not get a lump sum of money and interest right away as a line of credit allows the borrower to borrow certain amounts in the future and the interest charged will depend on the amount borrowed. So, borrowers will not be charged with interest until the line for funds is actually used.
Revolving credit, as well as Line of Credit, are two of the most popular forms of financing for personal as well as business borrowers as both offer open-ended loans. The available funds in both can be used as the borrower sees fit. However, the key difference between a Revolving Credit vs a Line of Credit is that revolving credit can be used multiple times up to a specific credit limit, but a line of credit is a one-time arrangement with a term limit.