What is a Revolving Line of Credit in Simple Words?

In addition to standard loans, when the borrower receives a certain amount in a lump sum and then repays it at the time set by the contract with interest, banks offer their customers a more flexible system of using borrowed funds. The lender gives the money in installments as the borrower needs. This type of loan is called a line of credit.

It is a bank service, which means that a borrower will be given a lot of sums (tranches) within a set limit over a set time. It has several loans but under one agreement. The bilateral agreement stipulates the lending terms at each stage and limits disbursement or indebtedness. We will also talk about credit cards with a 10,000 limit guaranteed approval.

Do not confuse the terms! The disbursement limit is the maximum possible amount that the bank disburses in total for the whole period of the credit line. The debt limit is the amount the borrower is entitled to receive in one tranche within the allocated line of credit.

Banks open credit lines to legal entities (organizations and enterprises with various forms of ownership), individual entrepreneurs, and individuals. A credit line is called non-revolving if the borrower receives the money in tranches, then returns it in installments and with interest, but cannot use the borrowed funds repeatedly. Its other names are simple or linear.

Revolving and Non-Revolving Credit line: Similarities and Differences

Let’s list the general provisions in using credit lines with and without a revolving limit:

  • the receipt and use of the loan are realized in installments;
  • the contract is signed once;
  • there is no need to reapply and re-collect documents before receiving the next tranche.

Non-renewable credit lines imply that if you add up all the tranches, the total amount will not exceed the credit limit. The borrower “portioned” the amount approved under the agreement, repaid, and no longer has access to the borrowed funds within the framework of a single agreement.

The revolving line of credit works differently: all tranches can exceed the approved limit. It is due to the repayment of previous tranches. The borrower has returned the money, but the agreement continues, and you are allowed to use the borrowed funds more than once. How many times it is possible to receive and return the amounts defined in the contract specified in the agreement.

Other Types of Credit Lines

Let’s look at several options. The first of them — a framework line, is usually considered separately in the general classification; the other two credit lines specialists more often refer to the varieties of the revolving line.

Frame Line of Credit

Its main feature is the targeted use of borrowed funds. Banks open a credit line to finance projects or transactions connected within the framework of a general agreement of the borrower. For example, businesses often apply to the bank to pay for equipment purchases under a framework line consisting of several deliveries. Each stage requires additional agreements with the lender.

Oncol Line

The loan is granted under the following conditions:

  • the bank sets a disbursement limit;
  • the borrower receives part of the money and repays it after a certain period;
  • after partial repayment, the limit is available again in full.

Line of Credit

The financing of the customer under the line goes as follows:

  1. The bank opens a loan account.
  2. The borrower withdraws money at any time based on their own needs.
  3. When the borrower replenishes the account, the funds received are automatically deducted immediately to repay the debt.
  4. For the borrower, such a service from the bank allows him to take the money only when he needs it and pay the loan only for the period of its actual use.

Credit Lines for Individuals

Companies and enterprises borrow money through credit lines to finance new projects, modernization, increase working capital, and purchase equipment. Private companies apply directly to banks, while state-owned companies place bids and documentation on the government procurement website. In addition, lenders study offers and sends potential borrowers offers of cooperation.

More and more often, regional administrations become clients of banks. They use revolving credit lines to solve the problem of the lack of budget funds.

Banks offer credit cards to individuals. It is a revolving line of credit for a private client; the lender sets a disbursement limit, just as it does for a legal entity. The borrower uses the money in installments: he pays for purchases or services within the agreed amount and then repays what he spends with interest.

Cardholders are often attracted by the grace period set by the bank. If the client returns the money during this period, he won’t have to pay any interest. However, if you don’t make it in the allotted time, pay back the used amount and interest.

Pay attention! Let’s say you have one or more credit cards, don’t use them, or use them infrequently and for small purchases. Even in this case, banks would include the card’s credit limit in the total amount of taken loans and can refuse a new credit due to the high level of indebtedness.

An example of an individual’s non-revolving credit line would be an educational loan. The bank transfers the university tuition fee in installments (a year or a semester), and the borrower repays the debt to the lender after graduation. It concludes the contractual relationship between the parties.

Requirements for Banks to Open a Line of Credit

The banks determine the total size of the credit line loan, the term, and the interest rate for each client individually. All the conditions and responsibilities of the parties are detailed in the contract. The credit line can be opened in national or foreign currency.

As a rule, a revolving credit line for legal entities lasts 3-5 years. But it is often shorter: from 6 to 18 months, long-term credit lines are opened by banks to large firms or proven regular customers. Private clients’ standard credit card terms are from 12 months to 5 years.

The bank has the right to charge interest either on the loan amount or only for a specific part of the money used by the client (an option beneficial to the borrower).

The interest rate can be:

  • fixed for the entire loan period;
  • vary depending on several factors.

In the latter case, we are talking about binding on specific indices (the rate of the Central Bank or the interbank exchange) or the terms of the contract, compliance with which affects the amount of interest.

Conclusion

Credit lines — a service especially demanded by business structures for growth and development. The main advantage of a revolving line of credit is the multiple uses of borrowed funds. For legal entities, banks open credit lines after a thorough solvency check. It is much easier for individuals to get a credit card. Many lenders require only a passport to apply.

1 thought on “What is a Revolving Line of Credit in Simple Words?”

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