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.
- 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.
- 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.