Revolving Loan & Non-Revolving Loan: Definition, uses, etc.

Topic Overview:

  • Revolving Loan is the loan which can be used repeatedly if sufficient balance remains.
  • The rate of interest is higher than any other loan.
  • The example of Revolving loan is Credit Card, Bank Overdraft etc.
  • Non-revolving loan is considered as a term loan where regular installment to be paid by the borrower.
  • In case of non-revolving loan the borrower can not re-use the paid installment.
  • Interest Rate is comparatively lower than revolving loan.
  • The Mortgage is needed for the non-revolving loan.

What is Revolving Loan?

The revolving loan could be compared with a credit card and overdraft where the borrower can continuously use this loan by paying only interest amounts. This loan allows the loan taker to use it repeatedly. The interest rate of this loan is extremely high and monthly compound interest is applied to the loan. It has a low monthly re-payment to keep the credit active.

Bank fixes a minimum sum as a monthly payment (commonly 5% of total dues) but the borrower gets to decide how much to pay down each month. If a borrower pays down the total sum each month, then no interest will compound over time.

Advantages & Limitations of Revolving Loan

The greater advantage of a Revolving loan is that the loan could be used by the borrower if he needs further amount. You don’t need to apply for a loan every time when you have not required cash to buy something.

Revolving Credit is too flexible to use, but this is a trap so that users can use it repeatedly. Without fixed payments, many people wait too long to pay off their balances. A high Compound interest to be added with a revolving balance.

What is Non-Revolving Loan?

Non-Revolving Loan commonly known as an installment loan where a Customer paid off his loan amount with regular monthly payments or as specified in the loan agreement. The sum is paid back with interest. This loan is commonly found in Home loans, Car Loans and Business Loans.

The interest of this loan is set at either a fixed or adjustable rate. The interest is determined each month at the going rate, and the interest is paid off each month with a monthly installment. Adjustable- the rate of this loan doesn’t fluctuate month to month, but it may go up or down year by year. Usually, the borrower is agreeing to pay monthly installment as specified in the Loan Agreement but this installment may vary from time to time if the loan modifies in the future.

Advantages & Limitations of Non-Revolving Loan

The main Advantage of a non-revolving loan is the lower rate of interest. Borrowers make a budget for utilizing the money and they have to submit their business plan and Cost Financing Pattern for proper use of money over time. They will know the moment they sign the loan documents exactly how much the loan will cost them.

The limitation of this loan is, the borrower may fail to pay installment timely and they will have to under penalty of breaking a contract. If the borrower has another financial emergency, the minimum payment must be met. Further, it is not possible to expand the loan size in the future.