Revolving loan or revolving credit is the bank facility, where the bank sets the limit of the facility before disbursement, and the borrower can deposit and withdraw the amount within the limit. The borrower can use the fund frequently within the limit. Normally, continuous deposit and withdrawn are observed in the revolving loan.
The revolving loan could be compared with credit card and overdraft where the borrower can continuously use this loan by paying only interest amount. This loan allows the loan taker to use it repeatedly. The interest rate of this loan is extremely high and monthly compound interest is applicable to the loan. It has a low monthly re-payment to keep the credit active.
The bank usually fixes the minimum sum of the monthly payment which the borrower need to pay as installment. But subsequently the borrower can withdraw the amount if it is covered in the limit of the loan. However, if a borrower pays down total sum at each month, the compound interest will not be charged to him.
Advantages of Revolving loan:
- Continuous uses of fund.
- Eliminates fund constraints.
- Deposited installment can be used again.
- Compound interest could be avoided by paying the full amount in each month.
Disadvantages of Revolving loan:
- The interest rate is excessively higher.
- The borrower can not free from debt for continuous uses.
- Annual fees are applied.
- Unnecessary purchases could be made.