What is Revolving and non-revolving loans -With Practical Examples
Revolving and non-revolving loans are two different types of lending arrangements, each with unique characteristics and applications.
01.Revolving Loan:
A revolving loan is a type of credit agreement where the borrower has access to a specific amount of funds, often referred to as a credit limit, which they can borrow, repay, and borrow again.
The borrower can use the funds repeatedly as long as they do not exceed the credit limit and adhere to the terms of the agreement.
Interest is charged on the outstanding balance, and minimum monthly payments may be required. Examples of revolving loans include credit cards and lines of credit.
Example of a Revolving Loan:
A credit card with a $5,000 credit limit. The cardholder can make purchases up to $5,000. If they make a $1,000 purchase, their available credit decreases to $4,000. Once they make a payment of $500, their available credit increases to $4,500, allowing them to borrow up to that amount again.
02.Non-Revolving Loan:
A non-revolving loan, also known as an installment loan, provides a fixed amount of money to the borrower upfront, which is repaid over a specified period in fixed installments.
Once the loan is repaid in full, the account is closed, and the borrower cannot borrow additional funds without applying for a new loan.
Non-revolving loans typically have fixed interest rates and set repayment schedules.
Examples of non-revolving loans include personal loans, auto loans, student loans, and mortgages.
Example of a Non-Revolving Loan:
An auto loan for $20,000 with a term of five years and a fixed interest rate of 4%. The borrower receives the $20,000 upfront and repays the loan in equal monthly installments over the five-year period. Once the loan is fully repaid, the account is closed, and the borrower no longer owes any money to the lender.