The Difference Between Revolving and Non-Revolving Credit
In the world of credit, there are two broad categories: revolving and non-revolving credit. Understanding the difference between the two will help you choose the right loan for your needs. Both revolving and non-revolving loans offer borrowers different advantages. These loan types vary in a few important areas that can help you make an informed decision about which loan is right for you. Here’s a quick overview of the differences between revolving and non-revolving credit.
What is Revolving Credit?
Revolving credit is a type of short-term credit that allows borrowers to draw down a set amount of money and pay it back at a later date. In contrast to traditional loans, revolving credit is offered on an as-needed basis. Credit cards, personal lines of credit, and home equity lines of credit (HELOCs) are examples of revolving credit. They can be used for all kinds of expenses like rent, utility bills, and food, among other things.
Why Should You Get Revolving Credit?
- Flexibility: Revolving credit is the best option if you do not have a clear financial goal.
- Reward points and cashback options: As long as you make on-time monthly bill payments, using a credit card to make purchases allows you to receive rewards points and cash back.
- Readily available funds: The ability to access the permitted maximum amount of credit whenever necessary is one benefit of having a revolving line of credit. Therefore, receiving a timely infusion of cash doesn’t require you to go through a drawn-out approval process. Instead, you’ll merely borrow money as necessary from your current line.
- No security deposit: You don’t have to put in a security deposit when you apply for a credit line or credit card, since these are unsecured loans. This means you don’t have to put an asset at risk if you fail to pay back your loan.
What is Non-revolving Credit?
Non-revolving credit is the most common type of credit. When you get a loan that has a fixed period of time the loan is repaid over, it is considered non-revolving credit. This type of credit includes home loans, personal loans, auto loans, etc. This type of credit is helpful for people who need a certain amount of financing at a certain point in time. These are good for people who know exactly when they need the credit and don’t need to change their repayment plan. It’s also a good option for those looking for a short-term credit solution since it’s often easy to get approved.
Why Should You Get Non-revolving Credit?
- Fixed expectations: The repayment schedule for some forms of non-revolving credit is more rigid than for revolving credit. This makes it easier for borrowers to plan their financial budgets because they know they have to repay a certain amount every month.
- Lower interest rates: Non-revolving credit options tend to have lower interest rates. This can help you save money in the long run.
- Collateral needed: Non-revolving lines of credit or loans often require collateral to qualify. If you have access to assets that work as collateral, non-revolving credit can be an option for you.
- Higher credit limit: Non-revolving credit lines and loans generally have higher maximum borrowing limits. If you have a larger expense you need to cover, you can apply for a non-revolving loan.
When you use funds from a non-revolving credit loan, they do not replenish – even when you make repayments. When your non-revolving credit limit is reached and you’ve paid it back in full, your account is then closed. So, at that point you were to want or need more funds in the form of a credit line, you’d have to fill out a new application. If you know the exact amount of money you need, a non-revolving credit option works best. If you are likely to borrow varying amounts of money, apply for a revolving credit line to give yourself easy access to cash.
Before making a decision, carefully research different lenders and loan options to find what works best for you.