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Revolving credit

Are you looking for a flexible form of borrowing money? Then a revolving credit can be a good option. A revolving credit can be suitable if you do not know exactly what amount you need, when you need this money and how long it will take you to repay the loan amount. In these respects, a revolving credit is very different from a personal loan. So for some there can certainly be advantages to such a credit, but are there also disadvantages? And what are these disadvantages?

What is revolving credit?

A revolving credit, also called a flexible credit, is a loan where you are given a credit limit and can withdraw money on that basis. In addition to the interest you pay for the loan, you also have to pay a monthly repayment. If you have repaid a certain amount, you can borrow money again up to the maximum limit. In this way you can pay off and borrow money whenever you want, without having to pay a fine. You also only pay interest on the amount withdrawn, instead of on the entire credit.

This form of borrowing does ensure that it takes a relatively long time to repay a revolving credit. In any case longer than a personal loan, because you can borrow money every time you have repaid. In addition, the interest with a revolving credit is variable and can increase over time. Also, this interest, as is the case with a personal loan, is not tax deductible for a renovation of your home. The maximum amount that you can borrow, the credit limit, depends, among other things, on your income and your current cost items. The maximum loan can often be calculated on the loan of the relevant provider.

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In the overview below you will find a comparison of online providers of revolving credits and the corresponding rates. The lenders listed below are ranked by lowest interest rate. In the example we assume a credit limit of USD 10,000 and a term of 36 months. We look at the provider, the product, the interest, the costs and the monthly costs.

Characteristics

A revolving credit has a few important properties. Whether these characteristics fall under advantages or disadvantages depends on your personal situation, wishes and requirements.

  • You pay a certain amount back to the provider every month. This amount is made up of part interest and part repayment.
  • The interest is not fixed and is therefore variable. This means that the amount to be paid can change during the term.
  • The term is not fixed. This means that you can borrow repaid amounts when you wish.
  • It is possible to make interim repayments, without being fined.

Spending limit

With a revolving credit you have more room to spend, because you do not have to withdraw the money in one go. This means that a revolving credit is suitable for expenses that you make in stages, for example refurbishing your home.

Interest and repayments

The amount that you have to pay each month to repay your loan is determined by the lender. This amount consists of part interest and part repayment. You pay the interest on the part of the loan that you have not yet repaid. As a result, the repayment part is getting bigger and the interest part is getting smaller, but the monthly amount to be paid remains the same. It is legally stipulated that the lender may charge a maximum of 14% interest.

In some cases, it is not clear to the borrower how much interest he actually pays per month. This ensures that the consumer is ultimately left with a difficult or non-portable monthly charge. If no or hardly any repayments are made, the result is that the loan becomes very expensive. This means that interest is paid on the outstanding loan amount for a long time, without this decreasing. That is why the AFM recommends that you always clearly agree with the lender how much will be repaid monthly, so that this is clear to both parties.

Duration

The term of a revolving credit is not fixed, in contrast to, for example, a personal loan. If you have repaid part of the borrowed amount, it is possible to withdraw this money again. In this case, it will take longer for the full amount to be repaid, as shown in the figure above. When the revolving credit is fully repaid, it is not automatically terminated. This is because you still have the option to withdraw money again. This can be a danger. Do you really want to cancel your revolving credit? Then it is mandatory to contact the provider.

Interest credit

Lenders also distribute loans on which only interest is paid. This is called interest credit. Because eventually the credit limit has to be reduced, the monthly costs of such a credit limit become very heavy over time. In some cases, the monthly payment with an interest credit is even doubled. Paying off an interest credit usually only happens when the age of 58-60 has been reached. Such an interest credit is certainly not for everyone.

Borrow flexibly

The most important feature of a revolving credit is flexible borrowing. This means that you can withdraw money at any time, provided you stay below the credit limit. On the other hand, you can make additional repayments for free at any time. This ensures that you have a larger spending limit and can borrow more money when you need it next time. This is because the spending limit is simply further away from the loan amount. The loan amount is calculated by subtracting the amount repaid from the credit limit. For example:

You have a credit limit of US $ 100,000. You borrowed $ 50,000, so you have $ 50,000 left up to the spending limit. To keep it simple, the repaid amount is already included. If you pay an extra 5,000 USD the following month, you still have 55,000 USD to your credit limit. This means that for any subsequent admission you can withdraw more than the month before.

Difference with personal loan

A revolving credit is often confused with a personal loan, because in both cases it is a relatively high loan for private individuals. Yet there are really big differences between these two forms of borrowing. In the overview below you can see the characteristics of both the personal loan and the revolving credit, so that the differences quickly become clear. To determine which type of loan to take out, it is good to keep these differences in mind.

Personal loan Revolving credit
Fixed amount and repayment amount Borrow flexibly
Fixed term and interest No fixed term and interest
It is not possible to withdraw money in the meantime It is possible to withdraw money in the meantime
Repayment without penalty is not always possible Repayment is always possible without penalty
Pay interest on the entire loan amount Pay interest on the amount withdrawn
Short-term is possible Short-term in almost no case possible

It should be noted here that with a personal loan it is in some cases possible to repay without penalty. However, this is certainly not always the case and a percentage penalty must be paid for additional repayments. This is never the case in the case of a revolving credit; additional repayments are penalty-free and can be done at any time, in most cases from 1 US dollar.

Benefits

In addition to the differences between personal loans and revolving credit, there are also advantages and disadvantages of a revolving credit. When taking out a loan, it is wise to also include these points in your decision.

The advantages of a revolving credit mainly have to do with the flexibility of the loan.

  • Withdraw money from your credit flexibly
  • Pay off without penalty, whenever you want and as much as you want
  • Always have money on hand, up to your credit limit

Cons

In addition to the mentioned advantages, there are also various disadvantages, or in this case risks, associated with a revolving credit. A well-known example of this is that consumers continue to withdraw from their loan. This means that you are attached to the loan for longer and the longer the loan is open, the longer interest must be paid. Nice for the bank, because a lot is earned from you, but certainly not pleasant for you. Other risks are:

  • Risk of interest rate rise due to variable interest
  • Extending the term through re-recordings
  • Credit is open longer than may be necessary

For more information about the risks of borrowing money, see the Nibud website.

Cheapest revolving credit

When you are looking for a loan, you naturally always want to take out the cheapest loan with the best interest. The providers shown in the overview above are ranked by interest. The overview also clearly shows whether there are additional costs for taking out a particular loan. Transferring a revolving credit is in all cases free of charge.

Requirements

Not everyone is eligible for a revolving credit. As with other forms of loans, there are conditions. When applying for a revolving credit, you must take the following conditions into account.

  • You do not have a negative BKR registration
  • You are older than 18 years (sometimes 21 or 23 years)
  • You have a fixed income
  • You have a valid ID
  • You borrow at least 2,500 us dollars.

Term life insurance

When comparing revolving credits, it is important that you keep a number of things in mind. In addition to the previously mentioned costs such as interest, total costs and monthly costs, the providers can also use small print. These often only become apparent during, or in the worst case, after taking out a revolving credit. When you compare the interest of revolving loans, you have to take into account that you have to take out term life insurance separately with some banks. This is an insurance policy that ensures that, should you die before you have repaid the loan, your next of kin are not left with the debt. Some banks have this insurance included as standard with their revolving credits, others offer this insurance separately.

Reassessment

In some cases it may be wise to have a reassessment of a revolving credit. This can be done by contacting the lender or the intermediary. Under no circumstances may costs be charged for this. Lenders give a recurring commission to the intermediaries for this and they in turn carry out a reassessment. You may also be approached for a reassessment. The AFM points out that, given the low interest rate, converting the loan to a loan with a lower interest rate can be a good solution, so that more room for repayment is created. Good to know: not every form of transfer leads to better situations or conditions. It is therefore important that you are well aware of the consequences in such a case.

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