Home Financial & Banking Terms What is a Revolving Loan?

What is a Revolving Loan?

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Revolving Loan

Revolving Loan

A loan facility which permits the Borrower to make multiple withdrawals and multiple repayments according to his convenience provided the outstanding balance stays within the approved limit is referred to as a revolving loan.  This form of loan is convenient and beneficial for those borrowers who have uncertain cash flows.  The terms give the borrowers flexibility to draw down or pay back the loan depending upon whether they are cash deficit or cash surplus. Cash credit and overdraft are examples of revolving loans.

Repayment/ Renewal

There is no repayment schedule for the facility but it is usually sanctioned for a specific period of time. Upon expiry of the prescribed period, the revolving loan is required to be renewed. In the event that the lender decides not to renew the facility, the Borrower will be called upon the pay the balance outstanding of the loan together with interest. These loans are also ordinarily subject to a condition that they are repayable on demand. Such demand is, however, normally made by the lender only in case of irregularity in the account or contract violations.

Interest

During the validity period of the facility, interest would be debited to the account on the agreed due dates and be deemed to be a draw down. The interest rate could be either fixed or floating.

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Randolph Rowe is a professional banker and former General Manager of Small Industries Development Bank of India (SIDBI). He brings with him the wealth of 34 years of all-round experience in the banking sector - comprising 12 years with IDBI and 22 years with SIDBI - which he combines with his flair for writing.

4 COMMENTS

  1. With the faster pace of life, flexibility of life is a demand. With this flexibility, a flexible monetary system is highly advantageous. This is provided by the revolving loan which allows everyone to withdraw or repay as many times as required. The article explain revolving loan in a wonderful way stating it as the revolutionary step in banking sectors.

  2. Revolving loan a good form of loan type. But a question that arises in my mind is that what happens in the event of non payment of loan or the expiry of the loan period? What is the security or the credibility under which it is issued? In the beginning the borower might pay the EMI’s but towards the end of the tenure he might not.

  3. In these modern times , cash flow is an uncertainty , especially for businessmen and traders. For them , a revolving loan is the best possible type of loan as they can make multiple withdrawals and multiple deposits in accordance with their cash flow. This was a new concept for me but the author as always has made the concept quite clear through his thorough knowledge of the subject.

  4. Great article, describing the possibility of obtaining the money for the period of time when you expect some cash flow problems. Or maybe even take some time off from your work and continue where you have left it in a few months time. This kind of loan can certainly make your decision easier.

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