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What is a revolving line of credit?
A revolving line of credit refers to a type of loan offered by a financial institution. Borrowers pay the debt as they would any other. However, with a revolving line of credit, as soon as the debt is repaid, the user can borrow up to her credit limit again without going through another loan approval process.
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 (HELOCs), 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.
Revolving lines of credit can be rewarded when accessed with a points-earning credit card.
Revolving line of credit examples
There are three common examples of revolving lines of credit:
- Home equity. With a HELOC, the borrower receives a loan in the amount of the equity on her house and puts up her home as collateral. She can borrow from that same credit line over and over again, as long as she pays it off in time.
- Personal line of credit. A personal line of credit lets the customer borrow from it as many times as she likes, as long as she repays her balance. Lenders may require significant documentation before approving someone, but personal lines of credit also have more lenient restrictions on functions like cash advances.
- Credit cards. A credit card is simply an instrument of accessing a revolving line of credit issued by a financial institution. Purchases made are deducted from from the stated credit limit and must be paid back at the end of each billing cycle.