One of the financing options that has become increasingly popular in recent years is revolving credit. It's characterized primarily by the flexibility it offers users, but the risks associated with this type of financing must also be taken into account.
Do you want to know what revolving credit is, how it works, and what its advantages and disadvantages are? So let's get to it.
What is a revolving credit?
A revolving credit is a line of credit, or financing modality that is characterized because the user can have a limited amount of money available. However, you don't have to take the entire loan; you can use it freely and then pay off the debt. For example, imagine you take out a revolving loan for one thousand euros.
Once you pay off that amount, the credit becomes available to you again without you having to start the process again to apply for another loan.
Revolving credit is related to revolving credit cards.
And how does it work? You see, you have a limited amount of money. That money is repaid through monthly installments in which you would pay the amount of credit you used plus the interest established in the contract you signed.
To make it easier for you to understand it. Imagine you are granted a revolving credit of 4.000 euros. You use 1.000 euros. That means you still have 3.000 euros available. Now, you pay 100 euros of those 1.000 you used. The available credit will no longer be 3.000 euros, but 3.100 euros.
The user can choose how much they want to pay each month, within the limits set by the financial institution that provides the loan. This way, as you make payments, the loan is renewed. This allows you to continue using that source of financing without having to apply for another loan or start the process all over again.
Now, one of the problems is that if you choose to pay low installments, then that portion of the payment goes toward interest, and the debt can drag on for years if you're not careful.
What advantages does revolving credit offer?
If you're considering applying for a revolving credit, you're probably already aware of all the advantages it offers. The fact that you can choose the monthly payment amount, adapting it to your financial situation and always within certain limits, allows you to personalize the way you pay back without stress.
In addition, you have that renewed source of financing without having to initiate procedures. Even so, when applying for a revolving credit, the process is quite quick and doesn't require complex procedures.
Finally, if you don't spend all the money you have available, you don't have to pay interest on all of it, just on the portion of it you use. For example, if you're granted €3.000 and only spend €500, the interest you'll have to pay won't be on €3.000, but on the €500 you spent.
Disadvantages and risks of revolving credit
Given the above, you might say that a revolving credit is a positive thing and a good alternative to loans and grants. But that's not the case. In reality, it has some disadvantages and risks to consider before making your final decision. This is a credit that typically has much higher interest rates than a loan. Furthermore, When the installments you choose to pay month by month are low, the debt can be maintained almost indefinitely., and in the end, you'd never finish paying. This means you risk becoming over-indebted, because since you have credit, you use it and accumulate debts that, in the end, will be more difficult to pay off.
Comparison of revolving credit with other types of credit
When it comes to applying for a loan, revolving credit isn't the only option. You also have personal loans, credit cards, online microloans, and even bank lines of credit.
All of them have special characteristics. For example, in revolving credit The usual APR is around 20-27% and, although it is open-ended, you have very high interest rates compared to other loans. One of the lowest APRs is a personal loan, with a rate between 6% and 12%, or a bank line of credit, with an APR of 5%-10%. In both cases, the term is limited, not indefinite, like revolving credit, but you avoid the high interest rates. However, you should be careful with late payment penalties or cash availability fees, which can be high.
On the other hand, A revolving credit could be a better option than an online microcredit, where the APR is usually between 30 and 100%. or more and the cost is disproportionate, and you may also incur penalties for non-payment.
Now that you know more about revolving credit, would you consider using this financing option?