Revolving Line of Credit
Definition
A revolving line of credit is a type of credit facility provided by a financial institution that allows the borrower to withdraw, repay, and redraw money up to a pre-approved credit limit on an ongoing basis. Unlike a traditional loan, which is disbursed in a lump sum with fixed payments, a revolving line of credit offers flexibility in terms of the amount borrowed and repaid.
Examples
Personal Revolving Line of Credit: An individual may use a revolving line of credit for discretionary or emergency expenses. For instance, a homeowner might use their home equity line of credit (HELOC) for renovations or unexpected repairs.
Business Revolving Line of Credit: A business might utilize a revolving line of credit for working capital to manage cash flow, pay for operational costs, or handle short-term financial needs. For example, a retailer might draw on their credit line to purchase additional inventory before a peak sales period.
Frequently Asked Questions
Q: What distinguishes a revolving line of credit from a term loan?
A: A term loan provides a lump sum that is repaid over a set period with fixed payments, while a revolving line of credit allows for continual borrowing and repayment up to a specified limit, offering more flexibility.
Q: How are the interest rates on revolving credit lines typically structured?
A: Interest rates on revolving credit lines are usually variable and can change with the prime rate or another benchmark rate. Some lines of credit may offer an introductory rate or allow for the negotiation of fixed rates.
Q: Can my revolving line of credit limit be increased?
A: Yes, borrowers can often request an increase in their credit limit, although approval depends on creditworthiness and the lender’s policies.
Related Terms
Revolving Credit: A broader term encompassing any credit arrangement that facilitates repeated borrowing up to a certain limit with no fixed number of payments.
Credit Limit: The maximum amount that can be borrowed on a revolving line of credit.
Home Equity Line of Credit (HELOC): A revolving line of credit secured by the equity in a borrower’s home.
Variable Interest Rate: An interest rate on a loan or line of credit that changes over time based on an index or benchmark.
Online References
- Investopedia’s Guide to Revolving Credit
- Wikipedia’s Entry on Revolving Loan Fund
- Bankrate article on Lines of Credit
Suggested Books for Further Studies
- Lines of Credit: Rethinking the Value of Credit in Developing Economies by Lydia J. D. Leynes
- The Handbook of Credit Management by Burt Edwards
- Principles of Bank Lending by Richard E. Cascarino
Fundamentals of Revolving Line of Credit: Business Finance Basics Quiz
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