A revolving loan is extremely flexible and can be used for any purpose. We explain how it differs from overdraft and how it works.
Revolving loan – additional funds that you will use repeatedly
A revolving loan is a good option when we have a stable source of income, but we need collateral for unforeseen expenses. We can use additional funds almost everywhere, with great flexibility and freedom. What does such a loan consist of and how does it work?
Revolving loan – what is it and what does it consist in?
A revolving loan is an individually defined and permanently available sum of funds for the so-called personal account, which we can use once our own money has been spent. Any new inflow to the account (e.g. salary, retirement or scholarship) causes automatic repayment and renewal of the loan , so you can use it every month again without worrying about repayment.
The revolving loan consists in the fact that the bank grants one amount for a specific period (usually 12 months), which, however, is not irreversibly reduced if it is violated or used. Spare funds can be used several times each month, provided the owner of the current account regularly settles with the bank and repays the debt – that is the essence of a revolving loan. In practice, this means that every person with permanent cash inflows (such as remuneration for work) will automatically repay the loan, so additional cash collateral will be automatically renewed each month.
A revolving loan and overdraft are not the same – they are distinguished by several important factors that are worth considering when applying for an additional account limit:
- above all, a revolving loan allows for a larger amount of spare funds (at mBank, the money limit ranges between $ 500 and even $ 150,000),
- the revolving loan agreement at mBank is valid for 12 months (although it can be easily extended if we have regular receipts),
- importantly, a revolving loan can be repaid throughout the duration of the contract . Unlike overdraft, it is not required to repay its monthly debt in full.
How can you use a revolving loan?
A revolving loan means that you can spend extra money for any purpose . You do not need to inform the bank about the type of expenditure. The revolving loan can be used freely and in any situation , as long as we run out of our own funds. The amount borrowed can be:
- paid at an ATM
- sent by bank transfer
- transferred via online transfer,
- used during non-cash transactions .
How to repay a revolving loan? Can you increase its limit?
The loan is repaid automatically every month when our account is credited with new funds. This does not mean, however, that we have to repay the entire loan every month. You should simply pay back at least part of the loan regularly and after 12 months the loan will be automatically renewed. However, the entire revolving loan, including interest accrued for the amount spent, should be repaid before the end of the contract if we decide not to extend it.
Although the amount of additional funds in a revolving loan is determined at the beginning and does not change over 12 months, you can usually apply for an increase in the monetary limit . The amount by which the loan will be increased will be calculated on the basis of the bank’s relationship with the owner of the current account (the bank will consider e.g. regular inflows to the personal account and their amount). The question of how to pay off a revolving loan and the way you use additional cash will not change as a result – you will still be able to use your borrowed funds in a flexible, convenient way.