A credit line, also known as a revolving loan, is a pool of additional funds granted by the bank that we can use as a loan at any time for any purpose. A bank credit line is always assigned to a current account, which is why it is often called an overdraft facility. It differs from the usual overdraft in the amount of the limit. The limit of funds to be used under a credit line is usually much higher than in the case of an overdraft.
Opening a credit line is also associated with an additional number of formalities, and the limit is set with each client individually. The procedure for granting a credit line is similar to a credit card or cash loan. The amount that the borrower can use in the case of a revolving loan is determined on the basis of the amount of inflows that go to his account. In the case of high-earning individual clients,
Revolving loan agreement
Usually the revolving loan agreement is signed for 12 months, and if the customer does not terminate it, it is automatically extended. During this time, the customer has free access to the allocated cash, which he can use repeatedly and at any time, and the debt together with interest automatically decreases with each inflow of funds to the account by the amount corresponding to the amount of the inflow .
A revolving loan is a very convenient solution. When we need an additional injection of cash, we can immediately use the allocated funds. We don’t have to apply for another loan each time for a specific purpose and we can only use as much funds as we need at the moment. If we do not use the whole limit, we pay interest only on the amount used.
What is a credit line?
The credit line may provide security in the event of sudden mishaps. The ability to immediately take advantage of the amount needed is invaluable in the event of a sudden illness, an unexpected and expensive car breakdown or another random event. However, the credit line is not only useful in emergency situations. It gives a sense of additional security and ensures that financial liquidity is maintained when we exceed the monthly budget we have. In addition, it is a convenient source of cash on all sorts of occasions, sales and promotions.
Not only individual customers are eager to use the credit line. It is a convenient source of additional funds for entrepreneurs, especially small, one-person companies. The rules for using a business credit line are similar to those for individual customers, with the difference that the limit amounts can be much higher.
Opening a credit line
If we decide to open a credit line, we must remember that there are usually additional fees associated with this. First of all, interest accrued on the value of debt and interest on late repayment. It also happens that the bank charges a commission for granting and renewing a credit limit.
When using a revolving loan, especially on several bills, you should be aware that if you use a credit line irresponsibly, the cost of maintaining it can increase significantly. Long-term negative balance and irregular repayments result in higher and higher interest being charged. Improper management of cash or patching other liabilities from credit line may lead to a debt loop and serious financial problems.
If for some reason we lose financial liquidity, and installments with interest begin to exceed the possibilities of timely repayment, it is worth using the help of a proven adviser who will help find the best solution to current problems.