• Personal Loan BYTES FROM OUR KITCHEN

    Revolving and non-revolving credit facilities

    A loan is a debt instrument that is backed by a promissory note wherein the borrower pledges to repay the lender for the funds borrowed in accordance with the terms of the contract. It is very useful because you can get access to funds without selling or liquidating your assets and can pay back in convenient instalments or in lump sum by the end of the tenure as per your agreement.If you need a personal loan in Singapore, you can either go for a term loan or a revolving loan because each has its unique benefits.

    Revolving Loan

    A revolving loan is a borrowing option that does not have a fixed repayment term. You can borrow any amount up to a certain limit.Overdrafts and credit cards are examples of revolving loans.

    Features of Revolving Loans

    These are usually unsecured loans. You can borrow money from a line of credit that the bank approves for you. You can borrow as many times as you want, subject to a limit specified by the bank. Each time you repay what you borrow, your account gets restored to that extent, allowing you to withdraw multiple times throughout the tenure of the loan. Make sure that you repay the cash you borrow as soon as possible since these loans usually have higher rates of interest than term loans.

    Revolving loans are best suited for situations when you have an irregular income or when you have unpredictable expenditures. Some banks also offer Home Equity Lines of Credit (HELOC). HELOCs allow you to place your home as collateral and get a line of credit to the extent of the equity value of your home. This is a secured revolving loan. Overdrafts and personal lines of credit are two examples of unsecured revolving loans. Various revolving loans are similar in many ways but also have their differences.

    For example, banks don’t charge annual fees on overdrafts but can demand you pay the amounts borrowed at any time. For personal lines of credit, banks charge an annual fee, but you can repay the borrowed amounts in minimum monthly payments rather than the bank demanding payment whenever it wishes. Banks charge interest only on amounts that you actually borrow and not on the credit line approved to you.

    Pros and Cons of Revolving Loans

    Pros

    • Borrow and deposit as many times as you want within the specified limit.
    • Pay interest only on the amounts you actually borrow.
    • Get cash as soon as you need it.
    • Helps you get through difficult financial times.
    • Spend the money you withdraw at your own discretion.
    • Annual Percentage Rates (APR) are usually lower than those of credit cards.

    Cons

    • APRs can change and this may increase your monthly payments.
    • Some facilities charge an annual fee even if you don’t withdraw money.
    • Your credit score influences your loan approval.
    • High charges and interest rates for late payment or non-payment of monthly dues.
    • Temptation to spend more than necessary as cash is readily available.
    • Not paying dues on time can adversely impact your credit score.

    Term Loan

    A term loan is a fixed repayment loan that has a fixed tenor and a fixed instalment as per the agreement. If you don’t make regular payments as per the predetermined schedule, you’ll end up defaulting and affecting your credit rating. The interest rate may be a fixed or a floating one. Just like revolving loans, term loans could be unsecured, in which case the rates are usually higher, or secured, in which case the rates are lower because the loan is backed by a surety – a guarantee or a pledged asset. Home loans and education loans are examples of term loans.

    Features of Term Loans

    These types of loans offer you a lump sum amount to be repaid in fixed monthly instalments. Some examples of term loans include personal loans, home loans, car loans, education loans, etc. Term loans often have lower interest rates than revolving loans. However, if you don’t pay your instalments on time, there are additional charges and fees that you will have to pay. Banks also charge additional interest on amounts that are not paid on time.

    Term loans are meant for those who want to borrow a “one-time” sum of money for a long period (usually a minimum of one year).  Before approving your loan application, banks usually consider your credit score. Having a good credit history makes you eligible for a higher loan amount. Banks are also likely to give you better interest rates and convenient tenures. A bad credit rating can affect your chances of getting a loan from a bank. Although you can try to get funds from non-banking sources, keep in mind that these institutions charge much higher interest rates than banks.

    Pros and Cons of Term Loans

    Pros

    • One of the best ways to get lump sum emergency cash.
    • Freedom of spending towards any purpose.
    • You can calculate your monthly expenses since you know how much you have to repay every month.
    • Repaying short-term loans on time can improve your credit score.

    Cons

    • Interest is charged on the whole amount, regardless of how much amount you have actually used.
    • Not paying your instalments on time can not only result in additional interest & late payment charges but also adversely affect your credit score.
    • Multiple eligibility criteria such as minimum & maximum age, residential (citizenship) status, and minimum income requirements.

    The following table provides a comparative analysis of the two debt instruments:

    Characteristic Term Loans Revolving Loans
    Repayment type Fixed repayment either in the form of instalments or in a lump sum at the end of the tenure Revolving throughout the allocated duration
    Fixed maturity Yes No
    Interest Usually lower Usually higher
    Recalled on demand Usually not possible The lender may set conditions on minimum payment ceiling or the payment schedule and reserves the right to impose a fine or discontinue the loan if you don’t adhere to the terms of agreement
    Multiple borrowings Not possible since the loan amount is predetermined and fixed, and the loan expires at the end of the tenure or once the debt is settled Throughout the lifetime of the product, you’ll be able to draw, pay back and redraw loans as soon as you settle the dues
    Purpose Usually long term Usually for short-term urgencies
    Surety May or may not have May or may not have

    Are Revolving Loans Better Than Term Loans?

    Not necessarily. Both types of loans are suitable for different purposes. If you need a one-time amount that you want to repay over a few years, a term loan is a better fit. But keep in mind that although longer tenures have smaller instalments, you pay more towards interest. If you have an irregular income or if you need to borrow cash intermittently, a revolving loan is the better option. Be sure to repay what you borrow at the earliest since these loans generally charge higher rates of interest. Whichever option you choose, always assess your need before you apply for the loan. Make sure that you will be able to pay the instalments or minimum monthly dues on time. Keep in mind that defaulting on the repayment will affect your credit score. If used wisely, both these types of loans can be of great financial help.

    For choosing a bank or a lender for a term or revolving loan, you can check BankBazaar to get a comparative picture. Getting the right financing is important. If you have an urgent need, a revolving loan or line of credit is better since the application process for a term loan tends to be more extensive. Again, if you have a one-time borrowing need, you shouldn’t apply for a revolving line of credit because the interest rates are usually higher than term loans.

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