What are Revolving and Non-Revolving Loan?

Revolving loans and non-revolving loans are two types of credit arrangements that financial institutions offer to consumers and businesses. They differ in terms of flexibility, repayment structure, and permitted reuse of funds.

  1. Revolving Loan:

A revolving loan is a type of credit that allows borrowers to access a predetermined amount of funds repeatedly up to a specified credit limit. As the borrower repays the borrowed amount, the available credit replenishes, allowing them to borrow again. The key features of revolving loans include:

  • Flexibility: Borrowers can access funds as needed, up to the credit limit, without reapplying for a new loan.
  • Revolving Credit Line: The credit line is replenished as the borrower makes repayments, making it available for future borrowing.
  • Variable Interest Rates: Interest rates can be variable, meaning they may fluctuate over time based on market conditions or other factors.
  • Examples: Credit cards and home equity lines of credit (HELOCs) are common examples of revolving loans.
  1. Non-Revolving Loan:

A non-revolving loan, also known as an installment loan, is a type of loan where the borrower receives a one-time lump sum payment, typically for a specific purpose. Unlike revolving credit, once the loan is repaid, the account is closed, and the borrower cannot borrow additional funds without applying for a new loan. Key features of non-revolving loans include:

  • Fixed Repayment Schedule: Non-revolving loans have a fixed repayment schedule, with regular installments over a predetermined period.
  • Closed-End Credit: Once the loan is repaid, the account is closed, and the borrower cannot access additional funds without applying for a new loan.
  • Fixed Interest Rates: Interest rates on non-revolving loans are often fixed, meaning they remain constant throughout the loan term.
  • Examples: Auto loans, personal loans, student loans, and mortgages are common examples of non-revolving loans.

In summary, revolving loans provide ongoing access to a line of credit with a replenishing credit limit, while non-revolving loans offer a one-time lump sum payment with a fixed repayment schedule and no ability to reuse the borrowed funds. The choice between the two depends on the borrower’s needs, financial situation, and preferences.