Definition of a revolving credit
When you need a loan, or simply need cash, you will naturally consult your banker. Depending on the nature of your needs, the latter will be able to present you with a whole range of loans, each more (supposedly) specific than the other. Of course, here we put home loans aside, but whether you have the urge to acquire a vehicle, or absolutely want the latest iPhone, there is a special loan made for you.
Yet, at the core, all personal loans are the same. These are loan contracts, more or less assigned to a particular destination. Whether they are called consumer loans, car loans, student loans or more, they are all made up the same way and follow the same rules. All except one; revolving credit ...
Definition of revolving credit.
A revolving credit, which until recently was called a cash reserve, revolving or permanent credit, is an envelope that can be used, in whole or in part, depending on passenger needs. This envelope can be reconstituted. That is to say that for each of your repayments, the part of the repaid capital is added to the funds remaining in the money reserve. Thus, it is possible to use and renew this envelope as long as the reimbursements are effective. Quite the opposite of an amortizable loan classic therefore, which goes out and disappears as soon as the last penny of capital repaid.
How to use a revolving credit?
Formerly, revolving credit offered only one possibility of use, the direct transfer of the desired amount to your current account. If this possibility still exists, revolving credit is used today more and more by a different means, more practical still, and more reactive especially.
Indeed, banking institutions all offer to back your credit card to your revolving credit. An option to extend your credit card, Visa like Mastercard, now allows you to acquire an item, service or consumer good by paying directly on credit. Thus, the sum will be debited directly from your money reserve, and not from your checking account. This new approach to the consumption of a loan allows more reactivity in the event of the unforeseen. And the default choice of a credit card is always cash payment.
It is also possible to attach your revolving credit to a current account, so that each excess overdraft is immediately filled by the equivalent amount from the money reserve. However, and taking into account the rates practiced on the agios as on the revolving credits, it is advisable to check upstream which is the operation which will cost you the least expensive; use of overdraft or systematic use of revolving credit.
Finally, just as you were able to transfer amounts from revolving credit to your checking account, the reverse operation is possible. Prepayments, partial or total are accepted and free of charge.
Term of revolving credit.
Before the Lagarde law package was put in place, a revolving loan could last almost forever. Indeed, the particular method of calculating interest on this type of banking product could lead to a derisory capital repayment, despite a fairly heavy monthly payment with regard to the household budget. Thus, with the reserve slowly replenishing itself, the cost of credit kept increasing throughout its life. But those days are over.
From now on, any revolving credit must be repaid within a maximum period of three years in the event of use less than $ 3,000, and within five years, for all amounts greater than $ 3,000.
In addition, these lines of credit are open for one year. This implies that they must be renewed on each anniversary date, as if it were a new loan. In fact, consultation by the bank of the bank incident file is compulsory each year. Every three years, the complete file must be reassembled. That is to say that your advisor must ask you again for the supporting documents constituting a loan file.
In addition, there are other conditions specific to revolving credit inactivity. And these conditions concern both the revolving credit itself and the option on the associated credit card.
Another important point concerning the duration, you can request, at any time during the life of the revolving credit, the reduction of the available amounts, the suspension of the use of the available funds, the termination of the contract, or the transformation of your outstanding loan used as a repayable loan.
How to take out a revolving credit?
The subscription of a revolving credit takes place exactly like that of a classic credit. You request a sum and you provide your supporting documents for income, and current expenses. In the light of these elements, your adviser will examine the various possibilities and will grant, or not, your request. Once the documents are signed, the funds are available. You then use them at your convenience.
A small clarification however, for all sums greater than $ 1,000, the advisor is required to make you an equivalent proposal for a depreciable loan, in particular if your need is related to the purchase of a specific good or service, once.
Repayment of revolving credit.
Concerning the reimbursement of the sums used, several possibilities are offered to you;
- Monthly repayment, according to the deadlines calculated by the finance company or the Bank;
- The monthly reimbursement calculated by you;
- Prepayment, partial or total.
In fact, banks provide you with a repayment schedule. But the latter cannot take into account all the parameters. Imagine that you have used half of the amount available, the amount of the due date is calculated according to the maximum duration not to be exceeded. Nothing prevents you from accelerating this repayment, either by increasing the amount of the monthly payments, or by carrying out an early repayment.
But nothing prevents you either, even as you repay your monthly reserve of money, to use the other half of it, or just part of the residual. This will therefore involve a new calculation of the amount of the due date.
Cost of revolving credit.
It's no surprise, a revolving credit often costs more than a depreciable credit. In fact, the only way to lower the cost is to replenish the reserve as quickly as possible. This is due to the method of calculation carried out on revolving credits, as well as to the rate, revisable and very high.
For example, consider a cash reserve of $ 4,000, of which only $ 1,250 is used. We are here in the case (less than $ 3,000) where the amount used must be repaid in three years maximum. Depending on your monthly payment, your repayment period will be read or shorter. So, if you opt for a monthly payment reduced to its maximum, but still allowing to meet the requirements of the Lagarde law, it will give this:
$ 52 monthly payment for a total cost of nearly $ 600. Either monthly, a return of capital slightly greater than $ 34, for $ 18 in interest and insurance. Or, in other words, an interest cost equivalent to almost 50% of the sum used!
On the other hand, if your repayment capacity is higher, and you double the amount repaid each month, you will get approximately this pattern:
$ 104 monthly payment for a total cost of $ 230, reimbursed in 15 months. And a total cost of interest that falls to less than 20% of the amount used. Each month, you'll pay $ 84 in principal, and $ 20 in interest and insurance.
As you can see, the amount of interest and insurance remain almost fixed, regardless of the amount of the gross maturity. So the higher your deadlines, the less it costs you. In an amortizing loan, the amount of interest is calculated on the remaining principal of the loan. It therefore decreases with each monthly payment. This is why it is preferable to use an amortizing credit to a revolving credit in case of limited repayment capacities. Otherwise, the maxim stated by Coluche takes on its full meaning: "The less you can pay, the more you pay!"
In the past, before the Lagarde laws, the repayment period of revolving credits was not limited. All that was required was a depreciation of the capital at each maturity, even very low. So, and if we go back to our example above, for $ 18 of interest and insurance, it was quite possible to repay only $ 19 gross every month, which allowed to amortize $ 1 every month. month. We let you calculate the time it would have taken to repay $ 1,250 ...
It is therefore very fortunate that these laws have come to strengthen the protection of customers and users of revolving credits.
Note, moreover, that the contributions of blue cards associated with revolving credits, are not integrated in the cost of the loan. No more than the cost of optional insurance.
In the end, if a revolving credit can be very useful in day-to-day management, especially in the event of unforeseen circumstances, it is essential to pay close attention to your repayment capacity before even subscribing. These loans are very convenient and flexible, but can turn out to be quite expensive.