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What is a Revolving Loan Agreement?
A Revolving Loan Agreement is a type of credit arrangement made by a financial institution where an account holder can borrow money, repay and borrow again until it expires.
A Revolving Loan is similar to credit cards, where an account holder has certain credit limits, once the limit is over, they have to repay the amount and can withdraw again after the repayment. It is a flexible financing tool for businesses and individuals as it provides flexible borrowing and repayment options without a lot of paperwork involved.
How does a revolving loan agreement work?
A Revolving Loan Agreement is similar to credit cards. For example, a revolving credit allows an individual or business to use a fixed amount of money as a revolving credit facility, where they have to pay a minimum amount every month once the bank statement is generated. If the monthly payments are not paid in time, a bank charges a certain rate of interest on the unpaid amount. So, it’s always a good practice to pay the minimum monthly payment in revolving credit to avoid hefty interest on the unpaid amount.
What is the difference between a revolving loan and an overdraft?
A revolving loan is a credit arrangement made by the bank or a lender with no payment deadline like a traditional loan. In such an arrangement, the credit limit has already been fixed by the lender, and the borrower can withdraw and repay the amount with applicable interest according to their ease. However, an overdraft is a credit facility provided by a bank up to a certain amount, once the amount exceeds the limit, a borrower can repay and again withdraw the amount. Through an overdraft account, one can easily withdraw the money up to the provided limit by the bank even if their account balance is zero.
What are the different terms in a revolving loan agreement?
These are the various terms used in a revolving loan agreement.
Credit facility: This includes the facilities provided by a lender to the borrower, the validity of revolving credit, and the total amount.
Applicable interest: On every revolving loan agreement, the borrower has to pay the applicable interest that has been already decided while borrowing the loan.
Principal Repayment: Normally the revolving loan has a fixed time period of certain years. After completion of the repayment deadline, a borrower has to clear the principal amount.
Collateral: Every lender will ask for some collateral to minimize the risk and decide the amount of revolving credit size.
Is a revolving credit facility a long-term debt?
Revolving credit is not considered as a long-term debt because in such a credit facility a borrower can withdraw the amount, repay and withdraw again.
Can you avoid paying interest?
You can avoid paying interest on your credits cards by paying off your balance before your grace period expires. The grace period is a preset period of time before which the due balance has to be paid. Following this period, the card issuer begins to charge interest on it.
If you pay your bill as soon as you have received your monthly statement you can avoid paying interest and being penalized.
Conclusion
A Revolving Loan Agreement allows a borrower specific credit limit which can be used multiple times. For instance, a borrower can withdraw the entire amount, pay it back, and withdraw again. This will also minimize the paperwork as compared to a traditional bank loan.
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