Lines of credit and revolving credit are quite similar. These loan products are especially helpful for those building homes, remodeling, and paying off other debts. While the terms of these products can be quite varied, there are general principles that apply to both. In general, these loans should not be considered long-term financial solutions, but rather bridge loans that carry you to the next product.
The term “revolving credit” and “line of credit” can be interchangeable. For example, a credit card is both a line of credit–one can take advances off the loan, repay it, then re-access it again–and a revolving loan. Revolving loan essentially means that the payments are recalculated each month based on the outstanding balance. The payments on each loan product can vary from month to month based on the amount of debt on the account.
One example of these two loans being dissimilar is the difference between HELOCs (Home Equity Lines of Credit) and credit cards. While both are calculated in very similar ways, a HELOC uses the security of real estate as collateral. Credit card debt, while the bane of some Americans’ existence, will never result in foreclosure.
The benefits of each of these products are this: flexibility. A standard closed-end loan provides a term (time in which the loan is repaid) and a standard monthly payment. At the end of the term, the loan expires and the debt is repaid. In revolving debt and lines of credit, consumers can choose to borrow the amount they need, and choose to repay the sum when they see fit. Most of these loans come with minimum payments that cover mostly interest.
Each month the lender calculates the amount of interest to charge on revolving debt and lines of credit. These calculations are based on the interest rate on the loan and the amount of debt currently charged on the credit line. Therefore, from month to month, payments can fluctuate wildly.
Lines of credit and revolving debt can be dangerous for those who struggle with fiscal responsibility. paying minimum payments on a HELOC or a credit card can result in many, many years of interest payments, with little principal reduction.