In personal finance, understanding different types of credit is essential for smart borrowing. Two common types are revolving credit and non-revolving credit. While both allow you to borrow funds, they differ in repayment structure, flexibility, and usage.
1. Revolving Credit
Definition:
Revolving credit is a type of credit where the borrower has a credit limit and can borrow repeatedly up to that limit as long as the outstanding balance is repaid.
Examples:
Credit cards
Home equity lines of credit (HELOC)
Key Features:
Flexible Borrowing: Borrow any amount within the credit limit.
Interest: Charged only on the outstanding balance.
Repayment: Minimum monthly payments required; balance can be carried forward.
Renewable Limit: As you repay, the credit becomes available again.
Advantages:
Provides ongoing access to funds
Useful for emergencies and day-to-day expenses
Offers rewards, cashback, or incentives on usage
Disadvantages:
High interest rates if balance is not cleared
Potential for overspending
Can affect credit score if mismanaged
2. Non-Revolving Credit
Definition:
Non-revolving credit provides a fixed loan amount that must be repaid over a specified period. Once the loan is repaid, you cannot borrow again without applying for a new loan.
Examples:
Personal loans
Car loans
Mortgages
Key Features:
Fixed Loan Amount: Set amount provided upfront.
Repayment: Fixed monthly EMI until the loan is fully repaid.
No Renewable Credit: Once repaid, borrowing requires a new application.
Interest: Typically lower than revolving credit for long-term loans.
Advantages:
Predictable monthly payments
Lower interest rates than credit cards
Helps with planned, large expenses
Disadvantages:
Less flexibility for additional borrowing
Cannot access funds again without a new loan
Penalties for prepayment may apply in some cases
Key Differences at a Glance
| Feature | Revolving Credit | Non-Revolving Credit |
|---|---|---|
| Borrowing Limit | Flexible within credit limit | Fixed loan amount |
| Repayment | Minimum monthly payments; interest on outstanding balance | Fixed EMI over tenure |
| Reusability | Yes, credit becomes available again | No, new loan needed for additional funds |
| Interest Rates | Generally higher | Generally lower |
| Best For | Short-term, recurring expenses | Large, planned expenses |
FAQs
Q1: Can I convert a credit card into non-revolving credit?
A1: No, credit cards are inherently revolving; fixed loans are considered non-revolving.
Q2: Which is better for emergencies?
A2: Revolving credit like a credit card is better for unexpected expenses due to flexibility.
Q3: Are personal loans safer for long-term borrowing?
A3: Yes, personal loans offer predictable EMIs and lower interest rates, making them suitable for planned expenses.
Q4: Can revolving credit impact my credit score more than non-revolving credit?
A4: Yes, high utilization and missed payments on revolving credit can impact your score more significantly.
Published on : 4th September
Published by : SMITA
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