Revolving credit – what is that supposed to be?! Even if the term does not mean anything to you, you have almost certainly at least used a subspecies of this “revolving” credit before. What this type of financing is, how it works and when such a credit is useful, you can find out here.
How a revolving credit works
You take out a loan and then pay a fixed installment to the bank every month until you have paid off the entire amount borrowed plus interest and other fees. This traditional form of credit is probably known to everyone. The revolving loan works in a similar way, but differs in some important ways.
With a revolving loan, you can receive and repay money several times. It can be drawn down as often as you need it, up to a pre-agreed amount. Only at the end of the contract period do you have to have repaid the entire money including interest.
An example: You conclude a revolving credit for 2,000 euros. You can then freely dispose of this amount during the term. You could take out 400 euros and two weeks later another 200 euros. Then you pay back 300 euros and immediately take out another 1,000 euros two days later. Just as you like. The important thing is that you never exceed the maximum amount.
The conditions required to obtain a revolving credit are similar to those of other types of financing. You must:
- be at least 18 years old, sometimes more,
- have a German bank account which is used for deposits and repayments of the loan sums
- can prove a perfect creditworthiness, for example by querying the Schufa entries.
These examples of revolving credits exist
Want to bet that you have used a comparable financing at least once before? The principle of revolving credit is the same as that used for your bank account. Although the beloved and at the same time feared overdraft facility, due to its high cost, is only a subtype of revolving financing, the procedure is reflected in it: a fixed amount of credit, which you use in whole or in part – or not.
In contrast, the classic revolving credit is the so-called framework credit. It usually has more favourable interest rates than the overdraft facility. And it functions independently of the current account. So you can also take out a framework loan with a bank other than your house bank.
Revolving credit is also available for credit cards. Here, all amounts paid by credit card are not due once a month, as is usually the case. Instead, you pay them off in instalments.
What are the advantages and disadvantages of financing
The greatest advantage of a revolving credit is its flexibility. You only specify the maximum amount and usually the term in the contract. You decide for yourself how much of the agreed framework you use, how often you borrow or repay money and for what you use it.
In this way, you will receive money quickly exactly when it is needed. And you can pay it back as soon as you are liquid again. You only pay fees for financing while you are in the chalk. The rest of the time, the revolving credit usually costs you nothing.
But: So much flexibility has its price. And this is particularly evident in the interest rates, which are often in the double-digit range with a revolving credit. This is why this type of financing is not necessarily worthwhile for large amounts or in the long term. Only those who need small to medium sums of money now and then over a short period of time can use a revolving credit to their advantage.