Legal Definitions - revolving loan

A revolving loan is a flexible type of credit that allows a borrower to repeatedly draw, repay, and redraw funds up to a pre-approved maximum amount. Unlike a traditional installment loan, where a fixed sum is borrowed and repaid over a set period, a revolving loan's available credit replenishes as the borrower makes payments. This means the borrower can access funds as needed, up to their credit limit, and the amount they have available to borrow "revolves" or becomes available again once they pay down their outstanding balance. Interest is typically charged only on the portion of the credit that has been used.

• Example 1: Personal Credit Card

  Imagine Sarah has a credit card with a $5,000 limit. She uses $1,500 to buy new furniture. Her available credit is now $3,500. When she makes a payment of $500 towards her balance, her available credit increases back to $4,000. She can then use that $4,000 for other purchases, pay it down again, and continue to use the card as long as she stays within her $5,000 limit. This illustrates a revolving loan because her ability to borrow funds replenishes as she repays her outstanding balance.

• Example 2: Small Business Line of Credit

  A small manufacturing company, "Widgets Inc.," secures a $100,000 line of credit from a bank to help manage its cash flow. In March, they draw $40,000 to purchase raw materials. Their available credit is now $60,000. After selling their products in April, they repay $30,000 of the drawn amount. Their available credit immediately increases to $90,000, which they can then use to cover payroll in May if needed. This is a revolving loan because Widgets Inc. can repeatedly access and repay funds up to their $100,000 limit, with the available amount fluctuating based on their payments and draws.

• Example 3: Home Equity Line of Credit (HELOC)

  John and Mary own a home and obtain a HELOC for $75,000, using their home equity as collateral. They initially draw $20,000 to pay for a new roof. Their available credit drops to $55,000. Over the next year, they make regular payments, reducing their outstanding balance by $10,000. This repayment automatically increases their available credit back to $65,000. Later, they decide to use $15,000 of that replenished credit for their child's college tuition. This demonstrates a revolving loan because they can repeatedly borrow against their home equity, and the funds become available again as they repay the principal.