Revolving Loan Definition And How It Works

Personal Loans

A revolving loan is a type of loan that allows the borrower to borrow, repay, and re-borrow funds as needed within a predetermined credit limit.

You can withdraw funds up to the allocated credit limit at any time without having to reapply for the revolving loan, again.

As you repay the loan, the available credit is replenished, and they can continue to borrow against the credit limit. Revolving loans are commonly used for credit cards, lines of credit, and home equity lines of credit.

Interest is typically charged on the outstanding balance of the loan, and the borrower must make regular payments to keep the loan in good standing.

Revolving loans offer flexibility and convenience to borrowers who have ongoing borrowing needs but may not know the exact amount they need to borrow in advance.

How Does It Work With An Example

A revolving loan works by giving the borrower access to a set amount of credit, which they can borrow and repay as needed, up to the credit limit.

Here’s an example of how a revolving loan works:

Let’s say that you are approved for a revolving line of credit with a credit limit of R10,000. You don’t need to borrow the entire R10,000 at once; instead, you can borrow and repay funds as needed, up to the R10,000 limit.

You borrow R2,000 to cover an unexpected expense. You then make payments to repay the R2,000 borrowed, plus any interest charged on the outstanding balance.

As you repay the loan, the amount you can borrow (your available credit) increases, up to the R10,000 limit.

A few months later, you have another unexpected expense, and you borrow another R1,000. You again make payments to repay the R1,000 borrowed, plus any interest charged on the outstanding balance. As you repay the loan, your available credit increases again, up to the R10,000 limit.

This process can continue as long as you need to borrow money and continue to make payments on time. Interest is charged on the outstanding balance of the loan, so it’s important to make timely payments to avoid accruing high interest charges.

Revolving loans are a popular option for borrowers who have ongoing borrowing needs, as they provide flexibility and easy access to funds.

Revolving Loan Pros And Cons

There are several pros and cons to taking a revolving loan. Here are some of the main advantages and disadvantages:

Pros:

  1. Flexibility: Revolving loans offer borrowers the flexibility to borrow and repay funds as needed, up to a predetermined credit limit.
  2. Easy access to credit: With a revolving loan, borrowers have easy access to credit without having to apply for a new loan each time they need to borrow money.
  3. Lower interest rates: Some revolving loans, such as home equity lines of credit, may offer lower interest rates than other types of loans because they are secured by collateral.
  4. Builds credit: Making timely payments on a revolving loan can help borrowers build credit and improve their credit scores.

Cons:

  1. High-interest rates: While some revolving loans offer lower interest rates, others can have high-interest rates, which can be costly over time if the borrower carries a balance for an extended period.
  2. Risk of overspending: With a revolving loan, borrowers have ongoing access to credit, which can make it easy to overspend and accumulate debt.
  3. Fees: Some revolving loans may come with fees, such as annual fees or cash advance fees, which can add to the overall cost of borrowing.
  4. Risk of default: If the borrower is unable to make payments on a revolving loan, they risk defaulting on the loan, which can damage their credit score and lead to additional fees and penalties.

Overall, revolving loans can be a good option for borrowers who need ongoing access to credit, but it’s important to weigh the pros and cons and carefully consider the terms and conditions of the loan before applying.

The Average Interest Rate for Revolving Loan

The interest rates for revolving loans in South Africa can vary depending on several factors, such as the borrower’s credit score, the lender, and the loan amount. Generally, the interest rates for revolving loans in South Africa can range from 18% to 32%.

Credit card interest rates in South Africa, which are a type of revolving loan, can be on the higher end of this range, with interest rates typically ranging from 20% to 30%. Other types of revolving loans, such as personal lines of credit or home equity lines of credit (HELOCs), may have lower interest rates, as they are secured by collateral.

It’s important to note that the interest rate offered to an individual borrower will depend on their creditworthiness and other factors. Borrowers with good credit scores and a strong credit history may be able to qualify for lower interest rates, while those with lower credit scores may be charged higher rates.

How to Qualify for a Revolving Loan

To qualify for a revolving loan, lenders typically look at several factors, including the borrower’s credit score, income, and debt-to-income ratio. Here are some of the factors that lenders may consider when evaluating a borrower’s application for a revolving loan:

  1. Credit score: Lenders will typically look at the borrower’s credit score to assess their creditworthiness. A higher credit score generally indicates a lower risk of default and may increase the borrower’s chances of being approved for a revolving loan.

  2. Income: Lenders may also look at the borrower’s income to determine if they have the means to repay the loan. A higher income generally indicates a lower risk of default and may increase the borrower’s chances of being approved for a larger credit limit.

  3. Debt-to-income ratio: Lenders may also consider the borrower’s debt-to-income ratio, which is the amount of debt they have relative to their income. A lower debt-to-income ratio generally indicates a lower risk of default and may increase the borrower’s chances of being approved for a revolving loan.

  4. Collateral: Some types of revolving loans, such as home equity lines of credit (HELOCs), may require the borrower to provide collateral, such as their home, to secure the loan.

  5. Payment history: Lenders may also look at the borrower’s payment history to assess their ability to make timely payments on their debts.

It’s important to note that the specific requirements for qualifying for a revolving loan may vary depending on the lender and the type of loan. Borrowers should carefully review the lender’s requirements and ensure that they meet the eligibility criteria before applying for a revolving loan.

How to Apply for Revolving Loans in South Africa

To apply for a revolving loan in South Africa, you can follow these general steps:

  1. Research lenders: Start by researching lenders that offer revolving loans in South Africa. You can compare interest rates, fees, credit requirements, and other terms and conditions to find the best loan for your needs.

  2. Gather documents: Once you have chosen a lender, you will need to gather the required documents to apply for the loan. These may include proof of income, ID or passport, proof of residence, and bank statements.

  3. Complete application: You can usually apply for a revolving loan online or in-person at a branch of the lender. Complete the application form and provide any additional information or documentation required.

  4. Wait for approval: The lender will review your application and creditworthiness to determine if you qualify for the loan. This process may take a few days or longer depending on the lender’s policies.

  5. Sign loan agreement: If your application is approved, you will be presented with a loan agreement that outlines the terms and conditions of the loan. Read the agreement carefully and sign it if you agree to the terms.

  6. Access funds: Once you have signed the loan agreement, you can access the funds from the revolving loan as needed, up to the credit limit. The lender will usually provide you with a credit card or other means to access the funds.

It’s important to note that the specific process for applying for a revolving loan may vary depending on the lender and the type of loan. Be sure to carefully review the lender’s requirements and terms before applying for a loan.