Revolving Credit Line vs. Non-Revolving Credit Line

• A revolving line of credit can be repaid and disbursed over and over, up to a certain credit limit.
• A non-revolving line of credit ends when the borrower repays the borrowed funds.
• Deciding between getting a revolving or non-revolving line of credit often comes down to your spending needs.

While inflation is beginning to cool at the gas pump and grocery store, extra cash, be it for a new business, an emergency, or as a cash reserve, is always helpful. One of the simplest ways to secure financing is through a line of credit. The application process for lines of credit tends to be quicker and less involved than for other types of financing such as business loans, personal loans, or mortgage loans. 

Lines of credit can be a useful stand-in for an emergency fund, especially in the early days of building cash reserves or in the aftermath of paying for an emergency. A line of credit can also help smooth cash flow for businesses that are seasonal or that experience sharp swings in revenues or spending.

But there’s more than one way to obtain a credit line: either as a revolving or non-revolving extension of credit.

Recommended Read: What is a Credit Ghost and How to Avoid Being One?

Revolving Credit Explained

A revolving line of credit allows you to draw on a defined credit balance as often as you like, as long as the account is open and loan payments are made promptly. With a revolving credit line, the amount of credit that is available for you to spend or draw equals the maximum credit line, plus or minus payments made or amounts owed.

Revolving Credit Example

Let’s imagine that your bank approves you for a revolving line of credit that has a limit of $1,000.  In your first month, you spend $100 on a purchase, leaving you with an available balance of $900 to spend or not spend, as the case may be. 

Your $100 payment can be paid off in one lump sum, paid a little at a time under the terms of any minimum payment requirements, or if no minimum payments are required, rolled over to the next month with only interest owed. Let's say that you opt to make the stipulated minimum payment of $25 and are charged interest of $5 on the $75 that is still owed.

You then start month two with an available credit line of $920, reflecting the $75 owed plus the $5 in financing charges. You spend another $100 on a purchase, which reduces your available credit to $820. As with month one, you’re faced with the choice of paying off the amount owed— $180–in full, in part, or not at all. You are able to pay off the balance in full this month, increasing your available credit to its $1,000 limit at the start of month three.

As shown in the above example, a revolving line of credit offers the opportunity to pay an amount owed in full and immediately, in increments over a period of time, or intermittently, see-sawing between paying nothing at all other than interest some months and paying the principal balance in other months. In this regard, revolving credit allows you to choose your own adventure and repay debt in whatever manner best suits you. 

Examples of revolving lines of credit include home equity lines of credit, also called HELOCs, and business or personal lines of credit.

Revolving lines of credit may be offered for a specified period of time with maturity dates as short as one month or for an undetermined amount of time, with language permitting the lender to close the account at the lender’s discretion.  As with mortgages and personal loans, the interest rate for a revolving line of credit depends on several factors, including your FICO score, earnings history, approved credit limit, and global factors like the economy.

Recommended Read: 6 Ways to Take Control of Your Finances

What Is a Non-Revolving Line of Credit?

A non-revolving line of credit is one where the credit limit is not restored to its original full balance each time payments are made, for instance, an auto loan or mortgage. Once all payments have been made and nothing more is owed, the account is closed and cannot be drawn upon.

The only way to gain access to funds again is to apply for a new line of credit.  However, there’s no guarantee that the lender will re-approve a non-revolving line of credit in the same amount or at the same terms. And if the borrower's financial situation has deteriorated or lending standards have become more rigid, the borrower could be denied.

Non-revolving lines of credit tend to be less risky from the lender's perspective because the loan balance, once used, is unavailable. The second attribute of a non-revolving line for lenders is that the loan is secured by hard collateral— a house or car— which can be foreclosed on for non-payment. This lower risk translates into a lower interest rate compared to revolving credit lines.

Recommended Read: 5 Tips for Buying Your Dream Home

The Advantages of a Revolving Line of Credit

The main difference between a non-revolving line of credit and a revolving line of credit is whether paid-down funds can be drawn on over and over, as is the case with a revolving line, or are a one-and-done proposition, as happens with non-revolving lines of credit.

Revolving lines of credit offer two key advantages:

• Evergreen borrowing: revolving lines of credit are sometimes referred to as evergreen financing because they remain in bloom as long as the accounts are in good standing. In this way, a revolving credit line that is used sparingly and as a last resort can substitute for and be relied on as part of an emergency fund strategy. 
• An Increased Credit Limit: A revolving line of credit that has a history of timely and in-full payments is often rewarded by creditors with a higher credit limit. A revolving line of credit can also be a great way to build a credit history and improve a credit score.
• Drawbacks of a Revolving Line of Credit
• Low borrowing power: Because revolving lines of credit can be tapped over and over without a fresh credit inquiry at each draw, the credit limits tend to be quite low.  Of course, credit limits can be increased with a history of timely payments and an improved credit score.
• Higher interest rates: The increased risk associated with an evergreen credit balance translates into a higher interest rate. Borrowers can minimize financing charges by paying off balances in full, or as close to full, each month.

The Benefits of a Non-Revolving Line of Credit

• Lower interest rates: Non-revolving lines of credit tend to be less risky, and thus reward borrowers with a lower interest rate.
• Larger credit limits: Non-revolving lines of credit entail significant lender due diligence, including reviews of credit reports, payroll records, tax records, and bank accounts, providing a better assessment of the borrower’s risk profile. As a consequence, the credit limit that a borrower would receive for a non-resolving line of credit tends to be higher than if the borrower were being considered for a revolving line of credit. 
• Budgeting ease: non-revolving lines of credit have a set monthly payment schedule based on a fixed credit amount and maturity date. As such, there tend to be few budgeting surprises for non-revolving lines.

Cons of a Non-Revolving Line of Credit

• Less nimble in emergencies: If you find your bank account needing a quick injection of cash to pay for an emergency, non-revolving lines offer a few solutions.  A brand new, time-consuming loan application and approval process will be required to obtain another non-revolving line of credit. 
• Prepayment penalties: Some non-revolving lines of credit charge a penalty if the loan is paid off early before the maturity date. It pays to read the fine print.

Recommended Read: Five Signs of Financial Instability

The Money Wrap-Up

A revolving line of credit gives you access to a specified amount of credit to use when and as you see fit. A non-revolving line of credit provides you with a lower interest rate. Deciding between the two often comes down to your spending needs. 

If you need frequent, quick bursts of cash, a revolving line works best because it doesn’t require a new loan application with each draw. For one-time large expenditures with a fixed price, such as a car, a non-revolving line is the better option, offering a lower interest rate and fixed monthly payments.