In the fever of promotional fever that prevails in stores, it is very difficult to use common sense. The consequence of this is often not enough cash in your account. In a situation where you need money in an amount higher than the balance on your bank account, a revolving loan is a good solution. How does it work and what is a revolving loan?
Revolving loan – definition of a concept
A revolving loan is one of the banking products that has recently attracted considerable interest. Since the Association of Polish Banks 1 has implemented a recommendation of good practices in the field of transferring bank accounts and services in Poland – banks are particularly interested in accessing revolving loans.
What is a revolving loan and how does it work? It is a revolving loan, a loan in the account or simply a credit line, which is closely connected with the current account, i.e. ROR-I. The vast majority of banks attach a revolving loan to a personal account. A revolving loan increases your account balance by an additional amount that you can use whenever you want. So it is the optimal solution for anyone who wants to have more cash than they have available in a given month 2.
How to use a revolving loan?
There are various situations in which the household budget requires a sudden injection of cash. This is particularly common in the “hot period” of increased spending. For example, in the pre-Christmas or holiday season. That is why, according to many people, a revolving loan is a good option to use – but only from time to time! In the long run, too much confidence, with this solution, comes with some risk of falling into a spiral of debt.
So how can you use a revolving loan wisely?
A revolving loan is usually granted for 12 months (with an option to extend it for another period). Therefore, after a specified period, it is necessary to pay the revolving loan in full! However, this is not a typical bank loan, which is repaid in monthly installments. The essence of this service is to “top up” your account with the amount that, at your request, the bank has made available. Of course, you don’t have to spend the whole amount right away. And even if you spend it, you don’t have to pay it back in installments. The most important thing is for your account to receive funds that will allow you to repay the debt along with interest indicated in the contract. This is how the bank will collect its receivables.
How does a revolving loan work? Example of account balance
The operation of a revolving loan is very transparent. I will show it by example:
The balance on your bank account is $ 3,000 each month. However, with the approaching opportunity, you will have to buy a larger sum. So you decide on a revolving loan of $ 4,000 for 12 months. Therefore, you have $ 7,000, which you can use for the next 12 months. During this time, your salary and other receipts will affect your invoice. In turn, you pay bills, loan installments or an apartment rental from your account.
If, in a given month, you have used e.g. $ 1,000 from the granted loan, the bank will take the used part of the loan (plus interest) from your account, and you will be able to use the entire revolving loan (i.e. $ 4,000) again.
Who is a revolving loan for?
Just knowing how it works and how a revolving loan works is not enough to be able to apply for it. Because the conditions for granting it vary depending on the bank. There are, however, several key parameters that affect the allocation of a credit limit on your account.
Above all, individual clients can apply for a revolving loan:
- They are of legal age
- They have Polish citizenship and live permanently in the country.
- They are citizens of foreign countries, but they are employed by an employer entity based in Poland or receive a Polish pension, retirement or scholarship.
In addition, a credit line is available when:
- Your invoice is systematically credited with income from salary, disability pension, retirement pension, and allowance.
- You have a personal account in a Polish bank, at least 3 months for regular and regular deposits.
- You have creditworthiness, and importantly, there was no debit balance on your account within the period specified by the bank (usually they are 3 months).
Revolving loan – how much does it cost and what fees do you have to take into account?
It is worth knowing that despite the undoubted advantages of a revolving loan and how it works, this product is associated with costs. How high they will depend largely on the amount requested or the individual assessment of the creditworthiness of the account owner. Nevertheless, its costs should include:
- Preparation fee – added once for consideration, preparation and signing of the contract
- The interest rate depends on the bank’s offer
- Commission – charged for opening a credit line
- Fee for restarting a revolving loan
What else is worth remembering? Certainly, despite the above fees, it is definitely a cheaper solution than cash loans. The interest rate on a revolving loan can be much cheaper than it appears from the banking table. Why? Because every payment to the account automatically reduces the sum of the active limit on which interest is charged.
If, despite the revolving loan application you have not used up the limit – you will not pay a zloty for it!
Debit and a revolving loan – what you need to know!
We have already presented how it works and what a revolving loan is. It is based on “topping up” your account with additional cash, which you can pay off even on the last day of the contract. And what is the debit itself?
The debit on the bank account should not be confused with the debit limit and revolving loan! In fact, although they have one thing in common – that is, more cash on the account, they are banking services that completely relate to various activities.
Debit is primarily a negative balance of the account – so simply the amount “in minus”, which was created as a result of the withdrawal of more cash than that available on the account. Example?
If your account had $ 2,500 and you have withdrawn $ 3,000, an overdraft of $ 500 will appear on your invoice.
The fact is that not everyone has the option of using an overdraft. However, to activate this function, usually one phone call per bank helpline is sufficient. Usually, if you have an overdraft, you must settle the commitment by the end of the month.
In turn, the debit limit is a solution somewhat similar to the overdraft itself, with the difference that it is more formalized. Requires and signing a contract with a bank – and is usually concluded for a longer period than 1 month, e.g. 6 months or a year. All this time the account holder can use the allocated debit limit. After this period – the bank will disable this functionality.
Advantages of a revolving loan – free use of funds
Analyzing the parameters of a revolving loan, it can be concluded that this is an attractive solution. And it really is. Its advantages include:
- Renewable – you can use it many times over a given period of time, without having to sign further loan agreements. This avoids lengthy funding procedures.
- Flexibility – the granted amount can be used for any purpose and time. Remembering that a revolving loan must be repaid within the prescribed period.
- Money just in case – a great solution when you need more cash than what you have every month.
- Low costs – you pay only for the period in which you used the bank’s money. There are no fees for the mere option of using extra cash. Even if you do not pay off the debt once, each payment to the account will reduce the loan amount and thus the amount of interest.
- A cheaper way to get extra cash than cash loans – you won’t pay any interest without using your funds!
- A good solution for “cash injection” for both individual clients and companies.
Disadvantages of a revolving loan – quick cash and ready debt
Nevertheless – there are situations where taking a revolving loan is not the best move. The disadvantages of this service include primarily:
- Costs – a revolving loan, like any other banking service, is not free. It assumes repayment of the sum utilized together with interest accrued.
- BIK figure – an account loan is recorded in the Credit Information Bureau just like mortgage and cash loans. That is why it is worth remembering to pay it on time. Otherwise – either it will improve your credit history – or it will significantly worsen it.
- The force of habit – even though the use of a revolving loan is simple and quick, by using it you can often fall into the clutches of excessive consumption. There is a risk, therefore, that you will treat virtual money as real – and you may experience quite a surprise when the bank claims its funds.
- A solution for people with a good credit history – in fact people who do not have a regular source of income will not use the service.
A revolving loan has its pros and cons. Therefore, whether it is a beneficial solution depends primarily on your individual life and material situation, as well as on your personal needs.