Banking and non-banking products for individual customers can be divided into several basic categories. We wrote more about types of bank loans here. Non-bank loans were the topic of another article that you can read here. One of the categories of financial product that operates on both the banking and non-banking market will be a credit line, also known as a revolving loan or overdraft facility (ROR). How does a revolving loan work? What is a revolving loan?
A revolving loan at the bank and at the loan company
A revolving loan functions as a product at the bank. In addition to cash, car and credit cards, it is one of the most popular consumer products.
Revolving loan and overdraft
The revolving loan in the bank will be closely related to our ROR. The bank will analyze our inflows to the account, their size and frequency. On their basis, they will be able to determine how resourceful our portfolio is and prepare an offer for a revolving loan. This offer will most often be visible to us after logging into electronic banking. If we do not use one, the bank will provide us with information about the offer through another communication channel. As part of the offer parameters, we will find above all information about the amount of the debit in the current account that the bank wants to propose to us. This amount will mean if we can exceed the funds available on our account and will define the amount of the revolving loan.
Available funds and capital balance
Let’s analyze the product on an example. Let’s assume that the bank offered me a PLN 10,000 line. This means that I can choose PLN 10,000 more from my account than I have accumulated on it. I agreed and signed the contract. On the day the line was launched, I had 3,000 PLN accumulated on my account. The bank has released funds. From now on I will be able to observe negative values on my account. As soon as the bank makes the money available, the amount of free funds from PLN 3,000 will increase to PLN 13,000. The account balance will, however, amount to PLN 3,000 – this is the status of my account without credited money. Let’s assume that I bought a car tomorrow for PLN 12,500. How will the funds in my account change? I will have 500 PLN free and I can spend that much. The account balance will, however, amount to minus (-) PLN 9,500. This means that I have exceeded the balance of funds available on the account by PLN 9,500 and this is my liability towards the bank at the moment.
I appreciate the lines. I used cash loans so far, and at one point the Agent recommended a revolving loan. At first I was not convinced, but over time it turned out that the product perfectly meets my expectations. I have irregular income, so thanks to the interest installment I don’t have to worry about whether I will be able to pay it in a given month. And if a better month comes along then I overpay for more capital. The line is a very flexible product.
How do I pay back the lines?
A revolving loan is one of the products in which the bank does not oblige me to pay back the capital.
It only requires me to pay interest. Naturally, however, the capital will be repaid with every inflow on my account. However, it depends on me whether I will leave the payment in part or in full or spend it. What is it actually about? My account balance today is minus (-) PLN 9,500. Tomorrow, however, I received a payment of PLN 3,000. The money was added to my current account, which means that they increased the available capital on the account to PLN 3,500 and reduced the debt balance to minus (-) PLN 6,500. Along with the payment, however, expenses appeared. I paid for the flat, car, living costs, loan installment. At the end of the month, it turned out that I spent the whole PLN 3,000 and I was at the starting point with the repayment of the line.