Revolving loan or credit card? As you can guess, these are one of the possibilities to receive additional financing for individual clients. However, how they work, who can be the beneficiary and whether it pays off, you will find out below. So what to choose? Credit card or revolving loan? Before we decide, let’s say a few words about both of these products.
A revolving loan and credit line are two names for the same product. This type of additional financing is inherent to the need to have a current account in the bank, i.e. a popular personal account. It is in the account that the bank provides the credit limit. What does this mean in practice? If we apply to a bank for a revolving loan and it issues a positive decision, in addition to the own funds that we have on the account, an additional pool of money will be launched. The limit will be as much as the revolving credit agreement. After using all our own funds from the account, we will be able to use the amount credited, up to the amount specified in the contract. However, we always use our own resources first.
We can apply for a revolving loan at any time. The conclusion of the contract is not synonymous with the need to pay or use credit funds. How it’s possible? As long as we have our own funds, we only use them. A revolving loan is only activated when our funds are over and we start using the money provided to us by the bank. This is a good safeguard for unforeseen situations and unplanned expenses. We decide ourselves if and when we will use additional financing, however, we always have a certain security cushion in case of financial problems.
The revolving loan offer in the savings and checking account is addressed to individual clients. Funds obtained in this way can not only be used at any time, but can also be used for any purpose. We have no obligation to inform the bank what funds will be spent on. In turn, the bank will not verify what we have allocated revolving loan capital to. However, as with any banking product in this situation, the decision granting a revolving loan will be preceded by a verification of creditworthiness. Importantly, the requirements are much smaller than for high mortgages, or even lower cash ones. The amounts of the credit line range from several hundred zlotys to even several hundred thousand zlotys. The collateral is usually regular receipts. However, the award of a higher amount may be subject to the need for additional insurance.
Revolving loan or credit card? Certainly a revolving loan is one of the cheaper solutions. Why? First of all, it is related to the fact that if we do not use the revolving credit granted, we do not incur any costs. The borrower pays only for the period in which he used the granted credit line, and interest is calculated only on the amount used. In addition, the repayment dates depend on the borrower’s ability, and not on the repayment schedule imposed in advance. However, the biggest advantage is that the limit granted can be used repeatedly. Each payment to your account reduces your debt and means that you can again use your funds and the remaining loan amount.
Most often, a revolving loan is granted for a period of 12 months. However, unlike an overdraft facility for companies, its extension for another period does not require us to submit an application. If we comply with the loan agreement and do not exceed the upper limit of the limit granted, the extension for another 12 months occurs automatically. What is important in this situation is the fact that for a revolving loan to be extended, we do not have to repay the limit by the end of the original loan period.
Revolving loan as an example
You have 5000 PLN of own funds on your account. In addition, your bank has granted you a revolving loan of PLN 5,000. You spent PLN 3,000 – they were collected from own funds accumulated on the account. Each time as long as we have our money on our account, all withdrawals, transfers and direct debits are financed first of all from our own funds. We spent 4000 the next day. 2,000 PLN of our own funds have been withdrawn from our account (at this moment we have 0 PLN of our own funds in our account) and 2,000 PLN from the pool of renewable credit granted.
The next day, the account received an income of PLN 3,000. In contrast to the debits on the account, which are first covered from own funds, in the case of inflows to the account, debts are first covered. After recognizing these funds, PLN 2,000 will be used to pay the debt (thus we have the full limit of PLN 5,000 available again), and the remaining PLN 1,000 will be credited to our account and it will be our own funds.
Revolving loan and debit
The concept of revolving credit is often confused with overdraft. However, despite some similarities, they are two separate products. First of all, a revolving loan involves the need to apply and conclude a separate loan agreement with the bank. It is connected with the necessity to undergo the entire lending procedure and to have creditworthiness at the appropriate level. As for debit, there is no such need and whether we can use it or not depends only on the offer of the personal account that we use.
The next significant difference is the amounts available. In the case of a revolving loan, it can even be several hundred thousand zlotys, where the debit amounts are much lower and usually range from several hundred zlotys to several thousand zlotys.
Credit card or revolving loan? Before we decide, let’s say what a credit card is.
A credit card is a separate and independent product. It is not linked to our personal account, so we do not need to have an account in a given bank to issue it. On the credit card we only have funds allocated by the bank, not own funds. So when you use a credit card, you don’t spend your own money at any time. The funds will always belong to the bank. In turn, the amount of available funds results from the loan agreement concluded with the bank as part of the credit card provided. The available limit is set in the contract and depends on both our preferences and creditworthiness.
To obtain a credit card, as in the case of a revolving loan, we will also have to go through the credit process and demonstrate creditworthiness at the appropriate level. Also in this case the purpose of the loan is not imposed in advance. The limit granted on the credit card can be used according to your preferences, without having to inform the bank about it. The limit granted can be used many times. Each card repayment reduces the debt and means that you can again use your repaid funds and the remaining amount until you use the limit granted. The upper limit of the credit card limit depends primarily on our creditworthiness, however, it is lower than for a revolving loan. As a rule, it does not exceed tens of thousands of zlotys. The repayment of the credit card does not depend solely on our preferences, because at the end of each billing period, the minimum amount specified in the contract is required.
What distinguishes a credit card from other products is primarily the interest-free period, which can currently be over 60 days. What does this mean in practice? If we repay the amount used without interest, as the name implies, we will not pay interest on the amount credited to us. However, if we do not pay all the debt during this period, we will have to pay a lot. A credit card is the most expensive form of credit. The loan interest rate is usually the maximum rate that banks can demand from the borrower.
Most importantly – a credit card is a payment card. The interest-free period applies only to non-cash transactions.
Any withdrawals from ATMs or traditional transfers from account to account using a credit card are not a good idea. They are not impossible. They are simply very expensive, not to say unprofitable. So if you decide to withdraw cash from an ATM using a credit card, the interest begins to run immediately. The same happens if we make a transfer from a credit card. There are not many institutions on the market that treat the transfer as a non-cash transaction and recognize the interest-free period. However, interest is not everything. Another issue is the commission for the bank. We will have to pay this amount when withdrawing from an ATM or when making a transfer, in the amount of about 3-4% of the amount withdrawn.
Credit card or revolving loan
So what will be the better choice – a revolving loan or credit card? Everything depends primarily on our preferences. We can’t clearly answer which will be a better choice, whether a revolving loan or a credit card.
We can only make a short comparison.
The limit available on your credit card will be interest-bearing higher than the limit available under a revolving loan, available in connection with your current account. Therefore, when answering the question, credit card or revolving credit, we must first think about what we need. If we need a quick injection of cash, which we will pay back in a dozen or so days together with the salary being paid into the account, we will avoid interest. Then the credit card will be the perfect solution, because we borrow money for free. However, if we know in advance that we will not be able to make a repayment in the interest-free period, a cheaper option will be a revolving personal account loan with a lower interest rate.
Revolving loan or credit card? The next issue will be the amount of the available limit. It should be borne in mind that in the case of a revolving loan in the savings and checking account, we can apply for much higher amounts than in the case of a credit card.
Another important issue is knowing that a credit card is a payment card. So it will be a good solution if you want to make only non-cash transactions for which no commission will be charged and the interest-free period applies. If we want to withdraw cash from ATMs using the card and make traditional transfers from account to account, then our choice should be a revolving loan in the account. In this case, the fees are not “overstated” and amount to the same as the standard fees in our account.
These are the most important questions that we should answer. The choice, credit card or revolving loan, should be determined primarily by our needs, not prevailing trends. We cannot clearly say about any of the above solutions – good or bad. It all depends on how it will be used.