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A revolving loan provides a borrower with a maximum aggregate amount of capital, available over a specified period of time. Unlike a term loan, the revolving loan allows the borrower to draw down, repay and re-draw loans on the available funds during the term of the note. Each loan is borrowed for a set period of time, usually one, three or six months, after which time it is technically repayable. Repayment of a revolving loan is achieved either by scheduled reductions in the total amount of the loan over time, or by all outstanding loans being repaid on the date of termination.
There are three common examples of revolving lines of credit:
Personal Line of Credit
With a non-revolving loan, the entire sum is paid out at approval because the customer needs to finance something right away, like if she’s paying for a house or car, and once the money is used it can’t be used again. The loan isn’t expected to be paid off any time soon, so in return the lender earns interest as monthly installments every time the borrower makes a payment against her principal.
For a revolving line of credit, also called open-end credit, the customer makes purchases against the credit up to a limit set by the lender. Typically associated with financial instruments like credit cards or home equity lines of credit, revolving lines of credit make it easy for customers to make purchases if they don’t have cash immediately at hand.
The customer can always use the credit for purchases as long as there is available credit remaining, and each billing cycle she can free up credit to use again by making her required payments.
Unlike non-revolving loans, the lender expects any balance to be paid off each billing cycle. In return, the lender gets to collect late fees as well as interest that accrues against the unpaid balance at very high rates. In some cases, collateral secures the revolving line of credit.