When you need some type of credit for whatever reason, there are two general types. Those include revolving credit and a line of credit. Generally speaking, revolving credit is just a specific type of a credit line. A line of credit and revolving credit are a set of financial arrangements made between a business or individual and a lending institution.
What Happens When you Get Revolving Credit or a Regular Line of Credit?
It’s important to know the difference between revolving credit and a regular line of credit and what each entails. With either, the lender gives you access to finances that you can use when you need them to make purchases. In many cases, the financial institution will refer to a revolving credit agreement as a “revolving line of credit.” However, there is one particular difference between a revolving line of credit and a regular non-revolving line of credit. Essentially, this is what ends up happening to the funds that are available in your account after you have made a payment toward it.
Exactly What is Revolving Credit?
Revolving credit is generally very similar to a regular credit card. A lending institution provides you with a specific maximum credit limit. You can make purchases whenever you deem necessary and typically make them on any type of goods. Revolving credit is frequently used by small business owners and corporations for the purpose of expanding their capital and to protect them against an unforeseen financial issue such as cash flow problems.
As long as you make regular payments on a timely basis toward your revolving credit account, there is a good chance that the lender will gradually increase your maximum credit limit, which is also very much like what happens with a credit card. It’s helpful to know that there are no set monthly payment amounts tied to revolving credit accounts. However, the account can accrue interest just like any typical credit card. When you make regular payments toward your revolving credit account, the funds become available to use for borrowing again so that you can make additional purchases. You can also use the credit limit as often as necessary as long as you don’t exceed the maximum amount.
What is a Non-Revolving Line of Credit?
A non-revolving line of credit generally offers the same features found in revolving credit. Once a credit limit is set, you can use the funds for a number of things, such as everyday purchases. Interest is charged toward the credit as well. The only chief exception is that the available amount of credit cannot be replenished after you make payments toward it. After the line of credit is paid off, the account is closed and cannot be used any further.
How Do These Types of Credit Accounts Differ from Other Lending Options?
Both revolving credit and a non-revolving line of credit are different from other types of loans. Standard loans like auto loans, student loans and mortgages work with specific types of purchases in mind. You are required to tell the lender the reason you need the loan and what you intend on using the money for before signing up for it and before you are approved for it. In addition, regular loans include set monthly payments, something that lines of credit don’t include.
There are both secured and unsecured versions of revolving credit and non-revolving lines of credit. A line of credit that is secured it generally borrowed against an asset that is used as collateral. Interest rates on those lines of credit are also traditionally a lot lower than those on unsecured credit accounts. One of the most common types of secured lines of credit is home equity lines of credit. This is the type that the lender allows you to borrow money against the equity in your home.
Overall, it’s important to explore your options of revolving credit and a non-revolving line of credit to ensure which is the best for you. It will benefit you financially in the long run.