What is a revolving credit?
Almost everyone has to deal with a form of revolving credit. This can vary from small amounts in the form of a fixed credit with a (mail order) company or a credit card to larger amounts with a bank or other lender and the construction deposit with the mortgage loan. That is why the revolving credit deserves to be carefully examined. In most cases you take out this loan for larger amounts. For small amounts, there is the mini-loan.
In a very old time, lenders granted you a loan when you needed it and the conditions were straightforward: you received an amount and then gave it back with interest in one go or in installments after a certain time. This worked well in most cases, so there was no reason to change this for a long time.
Some donors, however, noticed that for some of their customers they could keep a certain amount apart. Just as they had fully repaid their outstanding loans, those customers often returned to borrow the same amount again. As we humans always want, this observation was soon followed by a product that already took this into account in advance. The recurring borrowers were given the opportunity to place their required money in a separate container and, after some calculations, a fixed monthly amount was linked to it, which was to be used to pay off the withdrawn part and the interest on it.
Revolving loans are the easiest form of loans. Once closed, you can withdraw (and pay off) the required money at any given time – of course up to a predetermined maximum – without having to go through the entire mill of a request every time. Partly because of this, with most borrowers a revolving credit has slightly stricter conditions attached to the amount withdrawn. This results, for example, in a short possible time between withdrawal and repayment or – more often – a higher interest rate. The easier the withdrawal, the higher the interest. With a credit card or mail order credit, percentages of just below or even above 10% are common. Convenience costs money.
Revolving loans with most lenders for higher amounts usually do not come that high in terms of interest, but for the reasons already mentioned, they are still slightly more expensive than a personal loan. For most organizations, this saves somewhere between a few tenths of a few percent. Even higher maximum withdrawals – and you can think of, for example, construction deposits – are usually initially as expensive as the original mortgage, but are adjusted to the time as soon as they are used again. So this happens very little.
The set of conditions for a revolving credit are initially the same as for a loan, albeit somewhat tightened here and there. Precisely because the lender knows that you take out a revolving credit in order to always be able to withdraw the maximum amount, he can assume that this will also be the case for much of the time. On the one hand, this gives him the certainty of an income at the interest you pay, but also an extra form of risk. For example, it is more difficult for the self-employed and freelancers to take out a revolving credit. Just like with normal loans, it is not impossible.
As said, after the original application and the award, the suffering was suffered. When you withdraw an amount within the maximum allocated to you, it is your business and the lender does not fall for it, as long as you meet your obligations.
Because the revolving credit with the lowest maximum – the credit card – and the other not too high credits can often be closed without too much trouble, the combination of costs and conditions is something that you have to make yourself aware of.
It is precisely because, in contrast to a regular loan, that a revolving credit can be used to withdraw money over and over again without having to provide all the figures on income and expenditure, this form of credit is often the start of the road to debt restructuring. As long as both the lender and the borrower handle the credit wisely, nothing is wrong, but someone has to ring the bell when interest rates jump out. So always ask yourself in advance how much can I borrow without getting into trouble.
Due to the system of interest in force in the Netherlands, with a few setbacks a revolving credit of 5000 euros can yield a fixed debt of a few tens of thousands of euros. Postponing your obligations for a month, because you simply cannot meet them for a while, results in a fine – at least through the interest on interest system.
Taking out a revolving credit is very easy to practice. The possibility of being in the red on your checking account is already a form of revolving credit. Obtaining an option to be in the red gives you an extra opportunity to spend that amount once and then you use your income again to make up for it, so you cannot spend more than it enters. The moment it appears that after a few months you are not only positive again, but also positive, it is time for the second step: the credit card.
As long as you pay off the card and the interest amounts, you will continue to have the option to purchase items up to a pre-set maximum with a credit card. With reliable companies, this maximum is linked to your income, making it impossible for those companies to get into trouble too far. Less reliable companies grant credit too easily, so be careful. If this does not cause any problems, it is safe to take the next step: the real revolving credit.
All this seems fairly exaggerated, but the increase in debt restructuring indicates that none of these steps is superfluous. Psychologists and civil servants have been arguing for years for a system in which these steps are followed when applying for a revolving credit, possibly as yet.
If it’s okay
Of course, revolving loans often go well than not. Lenders are bound by law and regulations in such a way that they can only grant loans to people who can be assumed to be able to meet their obligations. Moreover, they also have an interest in this, because if their capital is always divided and the customers do not pay on time, this will lead to losses.
Customers are becoming increasingly intelligent in choosing the right product at the right time through experiences from their own environment and themselves. Fortunately, for example, at times when the future of the economy in the country becomes a little more uncertain than usual, people run to the bank less to take out loans. Growing unemployment therefore leads to fewer obligations and therefore more solvency among residents.
These developments are a good thing, as long as we are dealing with a government in this society that values patronage and related prohibitions. If we could not handle the revolving credit wisely, that would be his death blow.
Since the introduction of the revolving credit, the system has developed mainly across the board. Whereas, still, the average borrower not only offers an easy and reasonably manageable way to expand his financial scope, but also serves as a lubricant in the world of capital – and thus supports the economy – revolving credit is also a log device that sometimes causes more problems than it is worth.
Since we are not dealing here with a product that must have emotional connections, we can state, however, that the benefits still outweigh the disadvantages. Otherwise politics would have long since prevented them from entering into it.