Debts are of many different types, but, basically, it can be defined as the amount owed by a person or organization to another, due to past borrowing. Such borrowing of money and the resultant debt can be through a mortgage loan, auto loan or any other form. The common factor among such installment debts is that all of them involves repayment of the amount owed, within a specific date, that too as per the repayment terms that have been agreed to by the borrower as well as lender. But, a revolving debt differs from other types. Nowadays, credit cards have emerged as one of the easiest methods of obtaining credit and is the most common example of a revolving debt.
What is a Revolving Debt
As mentioned above, debts can be of different types and revolving debt is one among them. In case of other types of debt (like loan and mortgage), the borrower is required to pay a predetermined amount on a monthly basis, for a set period of time, within which, he has to repay the whole debt. But, in case of a revolving debt, there is no set period of time for debt repayment or any predetermined monthly repayment installment. The borrower is allowed to pay a minimal amount every month and is also allowed to take further credit, till he reaches his credit limit. This type of credit, wherein the credit limit varies on the basis of the purchases and payments made by the borrower, is called revolving credit. In case of a revolving debt, the quantum of the debt varies with the repayments made by the borrower and the further debts taken by him. In case of others debts like car loans, the debt amount reduces with monthly repayments, but, in case of revolving debts, the amount may vary. Another example for revolving debt is home equity line of credit (HELOC).
How Does Revolving Credit Work
The working of a revolving credit can be explained with the working mechanism of a credit card. We all know that a bank issues a credit card with a predetermined credit limit. A credit card holder can make purchases using the card, till he reaches his credit limit. His credit balance will be the difference between the money owed and the credit limit. He can decide the quantum of repayments, that cannot be below the minimum amount, fixed by the bank. An interest will be charged on the remaining debt amount, every month, but, if there is credit balance, the card holder can make further purchases with the card. This increases the credit card debt amount. So, in case of a revolving debt, the debt amount and the interest charged may vary.
Revolving Debt vs Installment Debt
Installment debts are those debts, which requires the borrower to make equal monthly repayments of a predetermined amount, for a set period of time, within which the debt has to be paid off. Auto loan, mortgages, etc., are classic examples of installment debts. While, installment debts come under secured loans (the lender can satisfy the unpaid debt through the collateral, which is pledged by the borrower, if the borrower defaults in making payments), revolving debts may or may not be secured. Another difference is that in most cases, installment debts are used for larger purchases, whereas revolving debts are usually associated with smaller ones. In a revolving debt, the balance debt amount and interest charged varies from month to month, but in installment debts, the debt amount reduces (the interest rate may vary).
In short, revolving debt is an easy option for debts, but, only if you repay them at the earliest. Use it sparingly to avoid accruing interests that can lead to financial difficulties. So, don't abuse this option and use it sparingly. Once used, repay it as soon as possible. You may also seek the advice of a debt counselor for a good debt management plan.
0 komentar:
Posting Komentar