A revolving credit is a form of credit that is characterized by the provision of a borrower, a sum of money that he will be able to use in his discretion, in whole or in part, without having to provide proof of use. It is a credit that is reconstituted as and when repayments made.
What is revolving credit?
Revolving credit, also known as revolving credit or permanent credit, is a special form of consumer credit, so the associated regulation is specific to it and somewhat different from credits such as the personal loan or the assigned loan. The reserve of money available under a revolving loan decreases when it is used by the borrower, and then gradually changes over time as repayments are made. It is a loan that can associate with a credit card (a credit card).
The borrower has the right to dispose of the sum made available by the lender as he sees fit. He can draw on the cash reserve in part or in full to make the desired purchases. However, these expenses can not exceed a certain limit, a maximum amount set when signing the revolving credit agreement.
The available sum is then reconstituted within the allowed limit, as the borrower repays his loan. He can then use it again, always under the same conditions.
A revolving credit can be offered by a bank, an institution specializing in consumer credit, a supermarket sign or a mail order store.
If the amount of the revolving credit is greater than 1000 dollars, the lender must also propose a credit amortizable to the borrower so that it can make a comparison of the two offers and choose the one that is best suited to his needs.
With regard to the repayment period, if the credit amount is less than or equal to 3000 dollars, it can not exceed 36 months (3 years) and can go up to 60 months (5 years) if the amount borrowed is greater than 3000 dollars.
It is possible to postpone deadlines twice a year at most if the borrower encounters difficulties in his repayments or in the event of deterioration of his solvency. However, a postponement of deadlines implies the suspension of the borrower’s right to use the revolving credit.
Once the credit is set up, each month, the lender must send the borrower a document summarizing the status of his loan. This includes the rate of the period and the overall effective rate, the amount available, the amount of the monthly payment and the interest portion, the date of statement of the statement and the date of payment, the amount of the repayments already made or , all the amounts due.
The contract for a revolving credit has a duration of one year and can be reinstated every year. Each year, the lender must verify that the borrower is not registered with the FICP (personal credit repayment incident file) before any renewal of the credit. Similarly, the creditworthiness of the borrower must be verified every three years.
The lender must also inform the borrower of the conditions for reinstatement of the credit as well as the repayment terms, three months before the end of the revolving credit agreement. If the borrower disagrees with the new terms, he or she has the right to object for up to 20 days prior to their application, which will automatically terminate the borrower’s loan agreement.
What is the difference between a revolving credit and a depreciable credit?
Unlike revolving credit, the amortizing credit is a traditional bank loan that consists of borrowing a set amount of money. In the context of a depreciable loan, the capital and interest are modulated in a particular manner and different from the revolving credit. Each maturity consists of a portion of the capital borrowed as well as interest. At the beginning of the credit, the amount of interest is higher than that of the repaid capital and as maturities progress over time, the share of capital increases while that of interest decreases.
An amortization schedule must be provided to the borrower at the outset of the contract. An amortization table is a document showing the distribution of the amount of each installment with the portion of the capital borrowed, interest and insurance costs, but also the amount of capital remaining to be repaid after payment of each monthly payment. The borrower may also request a reduction in the maturity amount which will extend the term of the loan and increase the total cost of the loan.
If ever this is the duration that the borrower wants to reduce, the monthly payments will be increased and the cost of credit will be lower. In all cases, it is the credit interest that is repaid in majority, before the borrowed capital. Conversely, in the context of a revolving credit, there is no refund to be made if the reserve of money made available to the borrower is not used by the borrower
. The credit starts only if it decides to use part or all of this sum. Once the loan is repaid, this reserve of money is replenished, which is not the case for a depreciable credit. In addition, the revolving credit allows the borrower to draw on this fund at any time, as he or she wishes.
What precautions should you take before subscribing to a revolving credit?
First, and this is the case for any type of credit, not just for revolving credit, it is important to be aware of its ability to borrow, whether in the short or long term. Thus, before borrowing, it is necessary to take stock of one’s personal and professional situation. Do the calculation of your income, including your salary but also additional income such as family allowances or alimony. Also, note the monthly charges that you must pay, including your rent, electricity, water, gas, paid support, etc. Also take stock of the credits you already have. All this information will allow you to calculate your living balance as well as your debt ratio.
The remainder to live is the amount of money you have each month, after paying all your fixed charges. The debt ratio is an index of your borrowing capacity, depending on the various credits you have already subscribed. It should be noted that it is rarely possible to subscribe to a new credit when the debt ratio is higher than 33%.
Many sites offer life balance calculators and debt ratios, so if you do not know how to do it yourself, you can simply do these calculations online.
All you need to do is enter some facts about your situation. Before subscribing to a revolving credit, it is also very important that you are ready to control your budget closely since this type of loan presents a lot of risks if you do not pay attention to its expenses.
Finally, do not forget to be wary of the contracts offered by banks or credit organizations because they can often be abusive and lead you to situations of financial difficulty. Read the contract carefully and pay attention to all the clauses for any revolving loan proposal so that you are aware of all the conditions and that the loan agreement can take place in the best conditions.
The annual percentage rate of charge of the revolving credit
One of the disadvantages of revolving credit is its interest rate since it is often much higher (on average twice as large) than conventional credit. It has the highest rates of all consumer credit and can be between 8 and 20%.
The interest rate of the revolving credit is revisable.
This means that it can be modified during the loan agreement provided that the borrower is informed and has the opportunity to refuse the change in question if it does not suit him. The law requires the lender to provide this information to the borrower in writing before the effective date on which the new rate is to apply.
If the borrower refuses this change, he will be forced to repay the entire balance of the outstanding credit according to the conditions previously established (the rate applying here will be the one that was defined before the proposal to revise it). ci) and the contract will be terminated.
The interest rate of a revolving credit can be revised upwards or downwards and the conditions of revision must be specified in the credit agreement. Contractual interest rates may vary depending on the benchmark but also depending on the terms and conditions of credit institutions, depending on the amounts borrowed. Generally, the higher the loan amount, the lower the interest rate.