In case of other types of debt (like loan and mortgage), the borrower is required to pay a predetermined amount on a monthly basis, for a set period of time, within which he has to repay the whole debt. However, in case of a revolving debt, there is no set period of time for debt repayment or any predetermined monthly repayment installment.
The borrower is allowed to pay a minimal amount every month, and is also allowed to take further credit, till he reaches his credit limit. This type of credit, wherein the credit limit varies on the basis of the purchases and payments made by the borrower, is called revolving credit.
In case of a revolving debt, the quantum of the debt varies with the repayments made by the borrower, and the further debts taken by him. In case of other debts like car loans, the debt amount reduces with monthly repayments, but in revolving debts, the amount may vary.
The working of a revolving credit can be explained with the working mechanism of a credit card. We all know that a bank issues a credit card with a predetermined credit limit. A credit card holder can make purchases using the card, till he reaches his credit limit.
His credit balance will be the difference between the money owed and the credit limit. He can decide the quantum of repayments, that cannot be below the minimum amount fixed by the bank.
An interest will be charged on the remaining debt amount, every month, but if there is credit balance, the card holder can make further purchases with the card. This increases the credit card debt amount. So in case of a revolving debt, the debt amount and the interest charged may vary.
Revolving Debt vs Installment Debt
Installment debts are those debts, which require the borrower to make equal monthly repayments of a predetermined amount, for a set period of time, within which the debt has to be paid off.
Auto loan, mortgages, etc., are classic examples of installment debts. While installment debts come under secured loans (the lender can satisfy the unpaid debt through the collateral, which is pledged by the borrower, if the borrower defaults in making payments), revolving debts may or may not be secured.
Another difference is that in most cases, installment debts are used for larger purchases, whereas revolving debts are usually associated with smaller ones. In a revolving debt, the balance debt amount and the interest charged vary from month to month, but in installment debts, the debt amount reduces (the interest rate may vary).
In short, a revolving debt is an easy option for debts, but only if you repay them at the earliest. Use it sparingly to avoid accruing interests that can lead to financial difficulties. So don't abuse this option. Once used, repay the debt as soon as possible. You may also seek the advice of a debt counselor for a good debt management plan.
Disclaimer: The information given here should not be used as a replacement for expert advice.