When you need a loan, or simply cash, you will naturally consult your banker. Depending on the nature of your needs, the latter will be able to present you a whole range of loans, more (so-called) specific ones than the others. Of course, apart from real estate loans, but whether you want to buy a car or you want the latest iPhone, there is a special loan for you.
Yet, basically, all personal loans are the same. These are loan agreements, more or less assigned to a particular destination. Whether they are called consumer loans, auto loans, student loans, or whatever, they are all made in the same way and follow the same rules. All but one; revolving credit …
Definition of revolving credit.
A revolving credit, which was still called a shortage of money, revolving or permanent credit, is a usable envelope, in whole or in part, according to the needs of the passengers. This envelope is rebuildable. That is to say, for each of your repayments, the share of capital repaid comes to add to the remaining funds on the money reserve. Thus, it is possible to use and renew this envelope as long as the repayments are effective. All the opposite of a depreciable loan classic, which goes out and disappears as soon as the last cent of capital repaid.
How to use a revolving credit?
In the past, the revolving credit offered only one possibility of use, the direct transfer of the desired amount to your current account. If this possibility still exists, the revolving credit is used today more and more by a different bias, more practical still, and more reactive especially.
Indeed, banks all offer to back your credit card to your revolving credit. An option to extend your credit card, Visa as Mastercard, now allows you to purchase an item, service or consumer goods by paying directly to credit. This will be charged directly to your cash reserve, not your current account. This new approach of the consumption of a credit allows more responsiveness in case of unforeseen. And the default choice of a credit card is still the cash payment.
It is also possible to attach its revolving credit to a current account, so that each overflow is immediately filled by the equivalent amount from the cash reserve. However, given the rates charged on both agios and revolving loans, it is important to check in advance which operation will cost you the least; use of overdraft or systematic use of revolving credit.
Finally, in the same way that you have been able to transfer amounts of revolving credit to your checking account, the opposite operation is possible. Prepayments, partial or total, are accepted and free of charge.
Duration of revolving credit.
Before the implementation of the Lagarde law package, a revolving credit could last almost forever. Indeed, the particular method of calculating interest on this type of banking product could lead to a derisory capital repayment, despite a monthly payment quite heavy compared to the household budget. Thus, the reserve slowly bouncing, the cost of credit was increasing throughout his life. But this time is over.
Henceforth, any revolving credit must be repaid within a maximum period of three years for use below $ 3,000, and within five years for all amounts over $ 3,000.
In addition, these credit lines are open for one year. This implies that they must be renewed on each anniversary date, as if it were a new credit. In fact, the banker’s consultation of the bank incident file is mandatory every year. Every three years, the complete file must be reassembled. That is to say, your advisor must ask you for the supporting documents that make up a loan file.
In addition, there are other conditions specific to the inactivity of revolving credit. And these conditions concern both the revolving credit itself and the option on the associated blue card.
Another important point regarding the duration, you can ask, at any time of the life of the revolving credit, the reduction of the available amounts, the suspension of the use of the available funds, the cancellation of the contract, or the transformation of your outstanding amount used in amortizable loan.
How to subscribe a revolving credit?
The subscription of a revolving credit is carried out exactly like that of a conventional credit. You apply for an amount and provide your income and current expenses. In the light of these elements, your advisor will examine the different possibilities and will accede or not to your request. Once the documents are signed, the funds are available. You use them then, at your discretion.
A little clarification, however, for all sums over $ 1,000, the advisor is required to make an equivalent proposal for a depreciable loan, especially if your need is related to the purchase of a specific good or service, once.
Repayment of revolving credit.
Concerning the refund of the sums used, several possibilities are offered to you;
- The monthly repayment, according to the deadlines calculated by the finance company or the bank;
- The monthly repayment calculated by you;
- Early repayment, partial or total.
In fact, the banking institutions submit you a repayment schedule. But the latter can not take into account all the parameters. Imagine that you used half of the available amount, the amount of the maturity is calculated according to the maximum duration not to be exceeded. Nothing prevents you from accelerating this refund, either by increasing the amount of the monthly payments or by making an early repayment.
But nothing prevents you either, even as you repay your monthly cash reserve, use the other half, or just a portion of the residual. This will therefore involve a recalculation of the maturity amount.
Cost of revolving credit.
This is not a surprise, a revolving credit often costs more than a depreciable credit. In fact, the only way to lower the cost is to replenish the reserve as quickly as possible. This is due to the method of calculation performed on revolving loans, as well as the rate, revisable and very high.
For example, take a cash reserve of $ 4,000, of which only $ 1,250 is used. We are here in the case (less than 3 000 $) where the amount used must be repaid in three years maximum. Depending on your monthly payment, your repayment term will be read or shorter. So, if you opt for a monthly payment reduced to its maximum, but still allowing to meet the requirements of the Lagarde law, it will give this:
52 $ monthly payment for a total cost of nearly 600 $. Either every month, a return of capital slightly higher than 34 $, for 18 $ of interest and insurance. Or, in other words, a cost of interest equivalent to almost 50% of the amount used!
On the other hand, if your repayment capacity is higher, and you double the amount reimbursed each month, you will get approximately this pattern:
104 $ monthly payment for a total cost of 230 $, refunded in 15 months. And a total cost in interest that falls to less than 20% of the amount used. Each month, you will pay $ 84 of capital, and $ 20 of interest and insurance.
As you can see, the amount of interest and insurance remains almost fixed, regardless of the amount of the gross maturity. So the higher your deadlines are, the less it costs you. In a depreciable loan, the amount of interest is calculated on the remaining capital of the. It therefore decreases with each monthly payment. For this reason, it is preferable to use a revolving credit against a revolving credit in the event of limited repayment capacities. Otherwise the maxim set out by Coluche makes sense: “The less you can pay, the more you pay!”
In the past, before the Lagarde laws, the repayment term of revolving credits was not limited. All that was required was a depreciation of the capital at each maturity, even very small. Thus, and if we take our example above, for 18 $ of interest and insurance, it was quite possible to only repay 19 $ gross every month, which allowed to amortize 1 $ every month. We let you calculate the time it would take to pay $ 1,250 …
It is therefore very happy that these laws have come to reinforce the protection of customers and users of renewable credits.
In addition, note that blue card contributions associated with revolving loans are not included in the cost of the loan. Nor is the cost of optional insurance.
In the end, if a revolving credit can prove very useful in day-to-day management, especially in the event of unforeseen circumstances, it is essential to pay close attention to your repayment capacity before you subscribe. These loans are very convenient and very flexible, but can be very expensive.