Until now you were convinced that it was one and the same? Error! Overdraft and revolving credit are two completely different solutions. How does a bank account with a debit operate? How is the revolving loan repaid? What do you need to know before you decide on a similar solution? Today we will explain to you what the difference between overdraft and revolving credit is in practice.
Debit: what is it?
Let’s start with the basics: debit is a certain amount of money that can be lent to us by the bank as part of our account. We use debit funds when we run out of our own funds available on this account. Remember that debit is not free! One of the costs to keep in mind is interest on the debit.
Can anyone get a debit? No! The bank lends us its money, which is why it must be certain that we will be able to pay the liability without any problems. Your creditworthiness is important. Is it worth deciding on overdraft? This question must be answered by everyone, but the additional funds available on our bank account may be helpful, for example if urgent but unexpected expenses suddenly appear on our path. However, you should be aware that debit requires a reasonable approach from us, it is a form of debt after all.
Revolving loan: definition
What is a revolving loan? It can be safely said that this is a kind of loan in the account, because the revolving loan is granted to the client as part of his savings and settlement account. What is a revolving loan? Let’s assume that your creditworthiness allowed you to receive a revolving loan in the amount of USD 10,000. Any inflow to your account means repayment of the loan, of course up to the level of the amount of the inflow.
For example: on your account the amount of USD 13,000 was available, of which USD 3,000 is your private money, while USD 10,000 is a revolving loan. You bought a new TV set that cost USD 7,000, which means you have used USD 4,000 a revolving loan. If then 6000 zlotys go to your account, the limit will be repaid and you will be able to use the whole sum again, i.e. 10,000 zlotys. Simple right? However, if only 2,000 USD would be credited to your account, this amount will be repaid within the limit, which means that you would have only 8,000 USD revolving loan available.
We already know how a revolving loan works. It is worth remembering that the agreement between the bank and the owner of the account, which concerns a revolving loan, is concluded for a specified period, often for 12 months. Account with a revolving loan: what to keep in mind before you decide on a similar step? About the costs!
Revolving loan – interest: what is worth knowing? A revolving loan bears interest, but beware: interest is only calculated on the amount you use. In the case of the above example, the bank would charge interest on USD 4,000. When analyzing costs, one should also take into account, among other things, the bank’s commission. Of course, both in the case of overdraft and revolving credit, these are not the only costs to be considered.
Debit and credit difference – what to keep in mind?
Debit and revolving credit: it might seem that both solutions are very similar, but between them there is also a whole spectrum of differences. What? First, the amount of overdraft and revolving credit is of fundamental importance. In the latter case, it is usually larger – it is worth considering if we are interested in any of these products. Secondly, a revolving loan and overdraft are paid off in a completely different way, which should also be borne in mind. Both terms are absolutely not interchangeable.
Debit or credit: what to choose?
Revolving loan: is it worth it? Or maybe debit will be a better solution? Which option should you choose? Our priority is a priority. If we know that we will usually need a larger amount, we can consider a revolving loan. In the reverse situation – overdraft. ATTENTION: when making the final decision, pay attention to the costs of overdraft and revolving credit and the form of repayment of the liability.
TO CONCLUDE: Revolving credit and overdraft are two different concepts. A revolving loan is usually for a larger amount, as opposed to overdraft. Both solutions also differ from each other, among others, the form of debt repayment and costs.