What is a Revolving Loan?

A revolving loan allows a party to borrow money, repay it, and re-borrow it again. In most cases, a revolving loan arrangement allows the borrower to access the money available for borrowing as many times as he wishes over the course of the revolving loan term. Typically, these loans also allow for a good deal of flexibility when it comes to the amount the person borrows. For example, a person may borrow the full amount available or any part of it.

Often, revolving loans include minimum payments that borrowers are expected to make on a regular basis. The minimum payment amounts to only a small portion of the amount the person has borrowed. The borrower usually has the right to pay just the minimum and borrow more if he likes or repay any portion of the borrowed money. If he would like to repay the entire amount he borrowed, he usually can do that as well, and often without having to pay an early repayment fee. This is unlike traditional loans in which a person makes a payment but is not allowed to borrow more without requesting an entirely new loan.

A credit card loan is an example of a revolving loan. With a credit card loan, a person has the right to borrow up to a certain amount of money. He may choose to borrow some of that money, none of it, or the entire available amount. While the borrower in such a case does have to repay what he borrows, he does not have to pay the entire borrowed amount at once. Likewise, if he does choose to repay the amount he borrows, that’s not the end of the loan arrangement; he can typically borrow and repay money multiple times until the credit card loan expires.

Sometimes people are confused about the difference between an installment loan and a revolving loan. This may be due to the fact that a person with an installment loan is permitted to make payments on the total amount of his loan rather than being required to repay it all at once. The two loan types are not the same, however, as an installment loan borrower is usually required to pay a set amount monthly over the life of his loan. Likewise, he is not permitted to borrow more money at will. Usually, the minimum payment on a revolving loan varies based on the interest rate, the amount borrowed, and other factors.