What is Revolving vs Non-Revolving Debt?
Debt is a tricky thing to deal with. It’s not something that we enjoy but, at the same time, it’s often necessary to make the payments that we simply can’t avoid any longer. What makes this all the more confusing is that there isn’t just one type of debt to worry about. Banks will frequently mention the different kinds of loans, interest rates and credit that you have to deal with but it’s always up to you to figure out what’s really going on. Many of us will no doubt have heard of things like Revolving Debt and Revolving Credit when working through our finances but what do these terms mean? How does revolving debt work and how is it different from other kinds of debt? What is Revolving vs Non-Revolving Debt?
Revolving debt refers to the money you owe on your revolving credit lines, in other words, it is not the predetermined amount of money that you need to pay each month for your fixed loans but is instead the shifting amount of money you owe depending on your current credit balance (although most forms of revolving debt will also require a minimum payment per month).
That’s a lot to take in all at once so let’s break it down. Revolving debt can most easily be understood when it is considered within the context of revolving credit and when it is compared to its non-revolving counterpart.
What is Revolving Credit?
Revolving credit can be seen whenever we spend too much on our credit cards. Depending on the particulars of your financial situation, the bank will usually allow you to borrow money against your set credit limit, after this, you will be expected to pay back a certain minimum amount each month (with interest) and the rest will carry over to the next month. So long as you have not hit your limit, you will be able to keep spending money even if you have not fully paid off the remaining balance.
Revolving debt then usually refers to the amount of debt that is carried over from month to month in these revolving credit lines. Due to the fact that you can keep spending up to your credit limit (or pay it off in varying amounts), your revolving debt can fluctuate from month to month as its interest rates are tied to the amount owed. So, let’s compare all of this with its opposite and see where that gets us.
What is Non-Revolving Debt?
Non-revolving debt is the kind of thing you’d expect to see when you buy a property. The key difference between the two types of debt is that a non-revolving loan usually operates on a kind of ‘once-off’ lump sum principal.
Put simply, the aforementioned revolving loans (like credit cards) allow you to continue to borrow money even when you have not fully paid off the outstanding balance, so long as you do not exceed the credit limit. By contrast, non-revolving loans (like home loans) cannot be reused once they have been paid off, either partly or in their entirety.
Additionally, revolving credit usually has varying interest rates depending on the remaining balance whereas non-revolving loans tend to have a fixed amount of interest that needs to be paid back according to a certain schedule.
What is the Difference Between Revolving and Non-Revolving/Fixed Debt?
Now that we’ve covered the two different types of debt in detail, let’s summarize the differences for simplicity’s sake –
|Revolving Debt||Non-Revolving Debt|
|Interest rates are based on the current balance and thus, can vary wildly||Interest rates are normally fixed at a certain amount|
|You can continue to borrow money so long as you pay the minimum required amount (plus interest)||You will need to apply for a new loan if you require more money|
|Interest rates tend to be higher||Interest rates tend to be lower|
|Once you have paid off the minimum amount, you may determine how much else you want to put in||Payment plans tend to be very static and you may even be punished for paying everything back early|
Is a Car Payment Revolving Debt?
No, it isn’t. Due to the inherent size of the loan required to purchase a car, we would usually expect to see a type of non-revolving system involved in such a purchase. By contrast, Revolving debts, like those involving credit cards, are usually what we would call ‘unsecured loans’, meaning they do not have an asset as collateral.
What Type of Debt is a Car Loan?
It is usually a fixed/non-revolving debt. While non-revolving/instalment debts can fall into the category of unsecured loans they usually do not and a car loan would fit in as an example of a secured loan instead of as it is backed by an asset (the car itself).
Should Revolving Debt be Avoided?
While it’s normally better to avoid debt completely, sometimes that’s not an option and we’re forced to make purchases when we’re low on money. So, what about Revolving Debt? Should it be avoided at all costs or does it have its uses?
Well, if you have to do some extra spending, revolving debt can be a useful option, but this depends heavily on your financial history and the amount of money you need.
Generally speaking, if you just need a little extra cash (especially in an emergency) and if you’re quite good at paying it back on time, revolving debt may work wonders for you. On the other hand, people who consistently reach their credit limit and have a hard time paying it back on time are going to negatively impact their credit score and will likely incur an unfavourable interest rate on their outstanding balance.
How do I get Rid of Revolving Debt?
Let’s assume you’re already well acquainted with the concept of revolving debt and you think it’s high time you make some changes. How do you go about getting rid of it?
As with any kind of debt, one of the best ways to tackle it involves creating a detailed financial plan to pay it off and following it strictly. This may include making many hard choices and a reduction in ‘frivolous spending’ but the upshot is almost always worth the sacrifice.
Another option may be to pay off the debt which has the highest rate of interest first. The thinking here is pretty straightforward – The longer that outstanding balance is left unattended, the harder it’s going to be to pay off, so it’s probably best to get rid of it as soon as possible.
In Conclusion – What’s the Difference Between Revolving and Non-Revolving Debt?
Both types of debt can be best understood by considering the nature of their origins – one is static/fixed (non-revolving) while the other is more fluid (revolving). But what does this mean?
Non-revolving debt can be seen in things like home loans. The borrower receives a specific lump sum (usually from the bank) with a fixed rate of interest. The borrower is also normally expected to pay back the debt at a steady rate according to a strict payment plan. By contrast, revolving debt is most commonly encountered when dealing with credit cards. The number of debt changes from month to month as the borrower keeps paying some off and then taking on more for additional purchases. On top of all this, the amount of interest tends to fluctuate based on the total amount of debt on the card.
Due to its varying nature, revolving debt can spiral out of control more easily and, if the borrower is unable to pay it back on time, it can have serious repercussions for their credit score. Most revolving credits also tend to be unsecured (meaning they are not backed by an asset), while non-revolving or fixed debts can be either secured or unsecured.
On average, larger loans will fall into the category of non-revolving debt as banks like to establish precise repayment plans with the borrower, these include things like property and vehicle loans. On the other hand, smaller loans usually go alongside revolving credit and revolving debt and tend to have higher rates of interest attached to them.
Revolving credit can be a useful financial tool if you need some money fast and you have a history of paying your debts back on time, however, people who constantly spend up to the credit limit and then take too long to pay it off will quickly notice their interest rates and overall debt spiralling out of control. If you intend to get rid of your revolving debt, it may be a good idea to create an intricate financial plan to budget your funds and pay back what you owe on time. Additionally, some people like to prioritise paying off loans that have the highest rate of interest attached so that they don’t have too much time to increase in severity.
Disclaimer Finance101: All of our posts are for research purposes only. Finance 101 aims to assist its readers with useful information on the laws of our country that can guide you to make financial decisions that will enable you to become more financially independent in the future. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law & finance related queries. Should you require specific legal/financial advice we advise you to get in touch with a qualified financial expert.
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