What Is a Revolver?
Let me explain what a revolver means in this context. A revolver is you or your company as a borrower who keeps a balance on a revolving credit line, paying it down monthly while drawing funds when you need them. You're only required to make those minimum payments each month, which cover interest and chip away at the principal. Companies often use this for working capital, like covering payroll or daily operations.
Sometimes people call it a revolver loan or revolving debt. But keep in mind, revolver loans are typically fixed-rate and more like standard business loans. On the other hand, a revolving credit line usually has a variable interest rate from the bank, so it can change with the market.
Key Takeaways
Here's what you need to grasp: A revolver is an individual or business borrower carrying a month-to-month balance through revolving credit. The name comes from revolving credit, which lets you keep an open line up to a limit and pay minimums based on your balance and the agreement's interest rate. Unlike that, non-revolving financing gives you a lump sum and requires fixed payments on a schedule. Things like low intro rates and rewards make revolving credit appealing for consumers and small businesses.
Understanding Revolvers
The term revolver stems from revolving credit, a form of financing. As a revolver, you as a consumer or business can open a credit line via a card or bank account, where the issuer sets a credit limit over time. Issuers make good money from revolvers because these lines stay open and in use for long stretches. Credit cards are the go-to example of this.
Revolving Debt Versus Non-Revolving Debt
You should know the differences between revolving and non-revolving credit, as each has its perks. Revolving lets you keep an open line up to a limit without fixed payments—instead, you pay a minimum based on balance and interest per the agreement. Non-revolving is a one-time loan payout with scheduled fixed payments.
As of August 2023, the Federal Reserve reports $1.28 trillion in outstanding revolving debt in the U.S. Businesses use non-revolving for project funding, and consumers for big buys like homes or cars. Approval standards are similar, but revolving applications are usually simpler. Fintech has boosted access to both, especially for underbanked folks, with options like Lending Club or Prosper for non-revolving.
Special Considerations: Revolving Credit Payments
You might be attracted to revolving credit for the low intro rates and rewards. When you make a payment, it lowers your balance and frees up more for borrowing. If you're in good standing, you can keep the line open indefinitely.
Common Questions About Revolving Credit
Does a revolving line of credit have a higher interest rate than non-revolving? Yes, typically—installment loans like non-revolving often come with lower rates.
What are some examples of revolving personal credit? Think credit cards, personal lines of credit, or home equity lines.
Are revolving credit accounts secured or unsecured? They can be either; a home equity line is secured by your home's equity, while a credit card is unsecured.
The Bottom Line
In summary, a revolver can mean the credit account or the borrower using it, but it's usually the account. Revolving credit gives you flexible spending over time, but watch out—high interest on things like credit cards can lead to spending more than planned.
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