Banks offer all kinds of financial products.
Revolving facilities are a great example. These are useful lines of credit people can use for various purposes.
Trouble is… there are several kinds, and it can get confusing. This post will clear up some of that confusion.
Let’s get started.
Revolving facility
A revolving facility is a type of credit that allows you to borrow, repay, and borrow again up to a predetermined limit. Unlike a conventional loan with fixed repayments, a revolving facility gives you ongoing access to funds as long as you stay within your credit limit and meet any repayment obligations.
What is a revolving facility?
A revolving facility, sometimes called a revolving credit facility or a revolving loan, is a line of credit that allows someone to repeatedly borrow money and repay the debt as they need it. As long as the revolving facility is open, the person can continue to borrow money within the limit. Without having to reapply for credit.
Revolving facilities can be re-borrowed. Standard loans can’t. That’s the big difference. Plus, the borrower only pays interest on the amount they withdraw. Not on the total limit.
Revolving facilities are helpful for:
- Covering unexpected bills
- Providing working capital in a business
- Funding business growth when there is an opportunity
Most of the time, you’ll hear someone talking about either a revolving loan or revolving credit. As if they’re the same thing.
There’s a difference.
Struggling to keep up with your debt? Our team can help make your debt affordable once again. We help thousands of South Africans to reduce their monthly debt repayments, protect them from legal action, and keep their assets — our team can help you too.
Revolving loans vs. revolving credit
A revolving loan and revolving credit are similar, but they have distinct differences. Revolving loans are usually set up for specific needs. Like a personal loan or a business covering an unexpected cost. In this case, the borrower borrows, repays, then borrows again. Whereas revolving credit is more general and ongoing. Like a credit card, where there is a set limit from which to borrow as often as needed.
Here’s a distinct definition for each. Plus examples to really drive it home.
Revolving loan
Revolving loans are usually used for specific financial needs (often by businesses). The borrower gets a credit limit to borrow against. Typically for a particular purpose like managing cash flow. They can then borrow, repay, and borrow again up to the limit.
Even though it is possible to draw and repay multiple times. Revolving loans are designed for one-time needs.
How does a revolving loan work?
- Credit limit: The borrower can borrow up to a set limit.
- Interest charges: Interest charges only apply to the borrowed amount.
- Repayment and reuse: Once repaid, the credit becomes available to borrow again.
Example of a revolving loan facility
A loan facility with a R100,000 credit limit. Allows a business or lender to draw R50,000 to cover an urgent expense.
The available balance is R100,000 – R50,000 = R50,000, and the outstanding amount is R50,000.
Over the next few months, the lender repays R30,000.
The new available balance is R50,000 + R30,000 = R80,000, and the outstanding amount is R20,000.
After which, the lender can continue to repay the outstanding balance or borrow from the R80,000.
Struggling to keep up with your debt? Our team can help make your debt affordable once again. We help thousands of South Africans to reduce their monthly debt repayments, protect them from legal action, and keep their assets — our team can help you too.
Revolving credit
Revolving credit is often used for general expenses or accounts. A credit card is an example of revolving credit. The lender gets a credit limit to borrow from as they need. They can make purchases, repay what they owe, and borrow again without reapplying for credit.
It’s an ongoing source of funds to use as needed.
The accessibility of revolving credit can make it a good option for unexpected costs. Especially, when the cost exceeds the savings in your emergency savings.
How does revolving credit work?
- Credit limit: The borrower can borrow up to a set limit.
- Interest charges: Interest is only charged on what the borrower uses.
- Repayment and reuse: Repayments restore the credit for future use.
Example of a revolving credit facility
A revolving credit facility with a R20,000 credit limit. Allows an individual or business to draw R5,000 to make a purchase.
The available balance is R20,000 – R5,000 = R15,000, and the outstanding amount is R5,000.
Over the next month, they repay R2,000.
The new available balance is R15,000 + R2,000 = R17,000, and the outstanding amount is R3,000.
After which, they can continue to repay the outstanding balance or borrow from the R17,000.
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In summary
Revolving facilities, like a revolving loan or revolving credit, offer flexible, ongoing access to credit.
Revolving loans and revolving credit are similar. The primary difference is the use and purpose. Either way, both allow lenders to borrow flexibly.
Just remember, interest charges add up. A revolving loan for R100,000 could cost thousands if you keep using it and repaying only the minimum amount.
It’s always better to repay the debt so that you don’t lose money on the cost of interest.
If you want to talk to someone about managing your debt, we can help. Try our online assessment at My Debt Hero to see if you qualify to reduce your debt.
