When nurturing the growth of a business, it is essential that a steady cash flow is maintained. A Revolving Line of Credit and a Line of Credit are two types of financial instruments that help achieve this task. Both products work quite similarly – An individual is offered a certain credit amount that can be used and paid back. It allows you to borrow funds when required, repay the amount with minimal interest and borrow the same amount for your usage. Only the amount utilized needs to be repaid. Even though the functionality is the same there are some differences that exist in their usage. Let us break these down in detail.
Revolving Line of Credit
A revolving line of credit is a type of loan where the borrowers can access funds upto their credit again after repayment is done. An individual is given a certain credit limit; as the user continually utilises the credit line and repays on time, the credit limit will increase. In simple words, a revolving line of credit allows the borrower to access a certain amount and if the amount is paid back with interest before the next drawing period, the borrower can access the same amount and the limit will remain unchanged.
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Line of Credit
A Line of Credit is a type of loan where a borrower can utilise funds upto a certain fixed amount. It begins with a LOC agreement where the borrower and the lender fix a certain amount and once the borrower has utilised the funds and repaid the amount with interest, the agreement gets terminated. This is usually used for projects that run for longer durations as here, one cannot determine the exact costs that would be incurred. The amount borrowed leads to the credit limit also changing – it will not remain the same.
Difference Between Revolving Credit vs Line of Credit
A revolving line of credit begins with an agreement that allows the business owner to borrow and repay the funds according to their requirements. The amount borrowed has to be paid back and the same can be borrowed again, thereby making it a revolving credit account. The account functions until the account is closed. Whereas, a line of credit functions for a specific period of time – it is a one-time agreement that gets terminated once the amount borrowed is repaid. The borrower has to pay back the full amount with interest on the due dates assigned for the repayment.
Another difference is that a revolving credit replenishes once the amount borrowed is paid back with interest and the credit limit remains the same. For example, let us say that an individual has a credit limit of Rs. 15,000 and he/she withdraws Rs. 10,000, they could withdraw the same amount after the repayment and the limit would still remain Rs.15,000. Whereas in a line of credit, from a limit of Rs. 15,000 if an individual withdraws Rs. 10,000 the limit would reduce by that much after the repayment leaving the limit to stand at Rs. 5,000.
In conclusion, though both a revolving line of credit and a line of credit are very useful financial instruments, the usage of each depends on the purpose and requirement of funds. Unlike traditional loans, in a credit line, a customer is only charged interest for the amount utilised not for the entire amount available in the limit. The borrower will not be charged until the credit line is actually used. The repayments are also not as regular and fixed like for a traditional loan. This makes them one of the most popular forms of financial services for both personal and business owners.
MyShubhLife provides effective plans of revolving line of credit that can be availed by customers from our partner companies depending on their requirements (Fino Payments Bank, PayWorld, MobiKwik, Easy Pay and Spice Money). 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.