Loans and revolving lines of credit are two different ways that individuals and businesses borrow money from lenders. Understanding the difference between the two is critical in being able to decide which is the right one for your situation and how it will affect your credit in the long- term.
A revolving line of credit is a type of credit that can be used repeatedly up to the approved limit until the account is open and the payments are regular and on time. Unlike a loan, the borrower has continuous and repeated access to the line of credit while it is active.
A term loan on the other hand is a non-revolving line of credit, which means the borrower has access to the entire funds only at one time and subsequently pays the principal and interest as per the monthly payment schedule.
Revolving Line of Credit versus Non- Revolving Line of Credit or Traditional Loans
| Revolving Line of Credit | Traditional Loan |
| Preset borrowing limit which the borrower can access any time, pay back and borrow again. | Borrower has access to the entire amount approved in one lump sum. |
| Credit can be used for any purpose. | A loan is usually taken for a specific purpose like purchase of a car or home or education. |
| A RLOC tends to have a higher rate of interest than a traditional loan. | Interest rates tend to be lower. |
| Interest is charged only on the amount withdrawn. | Interest is charged on the lumpsum amount whether used or not from the start of the loan. |
| Typically used for smaller expenses if a tight cash flow situation arises. | Mostly used for large purchases like a home or car. |
| An RLOC typically doesn’t need a collateral, especially if the account holder has a good history of business txn and creditworthiness. | Loans can be secured or unsecured. Secured loans may come with lower interest rates but need collateral. |
How do I know which product is better for me?
When shopping for credit, it is important to consider your unique situation- your needs, financial goals, ability to pay back etc. You will also want to compare interest rates, additional fee and repayment terms.
If you need money for a large purchase such as equipment or real estate, a term loan maybe the best option for you. On the other hand, if you need access to funds for working capital or to pay salaries for example, a revolving line of credit would be a better option.
Conclusion
An RLOC (overdraft) facility is a flexible credit line linked to a business month on month, allowing for short-term borrowing and repayments, while a loan provides a lump-sum amount for specific purposes, repaid in fixed installments over a defined period. The choice between the two depends on the individuals’ financial needs, situation, and preferences.
Both types of credit can be useful depending on the situation. Make sure you choose the option that is best suited for your purpose. Whether you choose revolving or nonrevolving credit, carefully consider the terms and borrowing cost and stick to the repayment agreement so you do not hurt your credit score.
MyShubhLife provides loans as well as effective plans of revolving line of credit that can be availed by customers from our partner companies depending on their requirements (Fino Payments Bank, PineLabs, MobiKwik, Spice Money and Easy Pay). There is a daily and a weekly revolving line of credit that can range from Rs.3000 – Rs. 5,00,000 to be utilized for your needs.
Log on to www.myshubhlife.com or download the MyShubhLife app to know more.