A Revolving Credit, also known as an overdraft facility, is a form of short-term credit line granted to a current account holder by a bank. It is a flexible credit facility that allows the account holder to overdraw their own account up to a certain, previously agreed limit. This form of credit is particularly useful for bridging temporary liquidity bottlenecks or covering unforeseen expenses. The interest on the amount of credit used is generally higher than for other types of credit and is only charged on the amount actually used.
The term “Revolving Credit” comes from Italian and Latin. The word “current account” is made up of “conto” (Italian for “account”) and “corrente” (Italian for “current” or “flowing”). Together they mean “current account” or “current account”. The term “credit” comes from the Latin “credere”, which means “to believe” or “to trust”. A Revolving Credit is therefore a loan that is made available on a current account based on the bank's confidence in the account holder's ability to repay.
Revolving Credits are used in various situations to bridge short-term liquidity bottlenecks or to cover unexpected financial expenses. Here are some typical use cases:
Revolving Credits offer a flexible and quick way of bridging short-term financial bottlenecks and ensuring liquidity. They are particularly useful in situations where funds are needed at short notice and quick repayment is expected. However, due to the higher interest rates, they should not be used for long-term financing.
This table provides an overview of the main advantages and disadvantages of a Revolving Credit and helps to weigh up whether this form of financing is the right choice for individual needs.
| Advantages | Disadvantages |
|---|---|
| High flexibility: Easy and quick to use for short-term financing requirements. | High interest rates: Interest rates are generally higher than with other forms of credit. |
| Solvency: Increases liquidity and solvency in the event of unexpected expenses. | Dependence: Can lead to permanent use and financial dependence. |
| No fixed repayment installments: Repayments can be made flexibly, depending on the financial situation. | Cost transparency: The cost structure is often unclear, which can lead to unexpected costs. |
| Immediate availability: The credit line is available at any time, without having to be checked again. | Overdraft risk: Risk of unconsciously overdrawing the account, which incurs additional costs. |
| No earmarking: Can be used for various financial needs, without proof of use. | Short-term nature: Less suitable for long-term investments and financing. |
| Room for negotiation: Conditions can often be negotiated individually with the bank. | Creditworthiness-dependent: The amount of the loan and the interest rates depend heavily on the borrower's creditworthiness. |
A Revolving Credit works as a flexible line of credit linked to a current account, allowing the account holder to overdraw their account up to an agreed limit. Here is a detailed explanation of the process:
The account holder can clear a negative balance at any time by making cash receipts or deposits, and interest will be charged accordingly. A Revolving Credit offers high flexibility and quick availability of funds, but is less suitable for long-term financing due to the higher interest rates. It is ideal for short-term, unforeseen expenses and to ensure liquidity.
What is a Creditor in this context?
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To the Creditor articleThis table provides a clear overview of the factors that influence the amount of a Revolving Credit, as well as typical credit limits for personal and business accounts.
| Factor | Influence on credit limit | Typical amount for private accounts | Typical amount for business accounts |
|---|---|---|---|
| Creditworthiness of the account holder | Good creditworthiness leads to higher credit limits. | Higher with a good credit rating | Higher with a good credit rating |
| Income and financial situation | Higher income leads to higher credit limits. Higher income | 1,000 € - 10,000 €, typically 2-3x monthly net income | 10,000 € - 100,000 € or more |
| Bank guidelines | Each bank has its own guidelines for credit limits. | Variable depending on bank | Variable depending on bank |
| Type of account | Business accounts often have higher credit limits than personal accounts. | 1,000 - €10,000 | €10,000 - €100,000 or more |
| Example private customer | Employee with €3,000 net income could receive €6,000 - €9,000 | €6,000 - €9,000 | N/A |
| Example business customer | Small company with €50,000 turnover could receive €50,000 or more | N/A | €50,000 or more |
Important terms relating to Revolving Credit
| Term | Explanation |
|---|---|
| Credit limit | The maximum amount that the account holder may overdraw. |
| Overdraft interest | The interest rate charged on the overdrawn amount. |
| Debit interest | The interest rate charged by the bank for the use of the Revolving Credit. |
| Account balance | The current balance of the current account, which can become negative if the Revolving Credit is used. |
| Credit limit | The amount that can be used at any time within the credit limit. |
| Credit check | The assessment of the account holder's creditworthiness that is carried out before an Revolving Credit is approved. |
| Borrower | The person or company using the Revolving Credit. |
| Lender | The bank or financial institution providing the Revolving Credit. |
| Current interest | The calculation of interest on a daily basis, depending on the amount of credit drawn and the duration of use. |
| Repayment | The repayment of the loan amount drawn down, which can be made flexibly and without a fixed repayment schedule. |
| Overdraft | The agreed credit limit within which the account may be overdrawn. |
| Tolerated overdraft | An amount in excess of the credit limit that is tolerated in the short term, usually at higher interest rates. |
| Credit period | The period over which the Revolving Credit is utilized. |
| Overdraft | Another term for Revolving Credit, often used in retail banking. |
| Liquidity | The ability to have sufficient funds available at all times to meet payment obligations. |
This table provides an overview of the most important terms relating to Revolving Credit and their meaning.
To calculate the cost of a Revolving Credit, i.e. the interest costs, we need the loan amount, the interest rate and the days of use. Finally, it must be divided by the 365 days of the year.
The following formula can be used to calculate the costs of a Revolving Credit or the interest costs within it:
The variables stand for:
Let's assume you have a loan amount of €1,000 at an interest rate of 10% and use this loan amount for 30 days.
Interest costs = €1,000 x 0.10 x 30 / 365 = approx. €8.22
In this example, the interest costs for using the Revolving Credit for 30 days are around €8.22.
This table provides an overview of the typical fees and interest that can be charged on a Revolving Credit.
| Fee/Interest | Description | Typical amount |
|---|---|---|
| Debit interest | Interest on the amount of credit utilized | 5% - 15% per year |
| Commitment interest | Interest on the unused portion of the credit line | Rarely charged, typically 0.1% - 1% per year |
| Overdraft interest | Additional interest if the credit limit is exceeded | 1 % - 5 % higher than the regular debit interest rate |
| Processing fees | One-off fee for setting up the Revolving Credit | €50 - €100 or more, depending on the bank |
| Account maintenance fees | Fees for maintaining the account if a Revolving Credit facility is set up | Monthly or annually, variable depending on the bank |
| Additional costs | Other possible costs, e.g. for account statements or special services | Variable, depending on the bank |
Revolving Credit can be inherently expensive, and here are some reasons why.
The following diagram shows an overview of the reasons for an expensive Revolving Credit.
Revolving Credit can be expensive, especially if it is used frequently and for long periods of time. It is important to only use this credit for short-term financial bottlenecks and to repay it as quickly as possible to avoid high interest costs. Account holders should also be aware of the terms and conditions of their Revolving Credit and consider alternative financing options if they need long-term financing.
Revolving Credits usually have higher interest rates compared to other forms of credit such as installment loans or mortgages. This interest is calculated on the actual amount drawn down and can be significant, especially if the loan is used over longer periods of time.
In addition to the debit interest, other fees may be charged, such as processing fees, account management fees or overdraft interest if the credit limit is exceeded. These additional costs increase the total cost of using the credit.
As interest is calculated daily and debited to the account monthly, the compound interest effect can become noticeable. This means that interest can be charged on interest that has already accrued, which further increases the costs.
The flexibility of repayment can mean that the loan amount remains unused for a long time. Without fixed repayment installments, the debt can remain outstanding for longer periods of time, leading to higher interest costs.
If the agreed credit limit is exceeded, overdraft interest may be incurred, which is even higher than the regular debit interest. This further increases the costs and can lead to a considerable financial burden.
This table gives a clear overview of the main differences between a Revolving Credit and a Loan and helps to decide which financing instrument is best suited to different needs.
| Characteristic | Revolving Credit | Loan |
|---|---|---|
| Purpose | Short-term liquidity protection | Financing of larger, usually long-term purchases |
| Flexibility | Very flexible, available at any time | Less flexible, fixed terms and repayment modalities |
| Interest rate | Higher, variable | Lower, usually fixed |
| Repayment | No fixed installments, repayment flexible | Fixed installments, regular repayment |
| Availability | Immediate availability up to the credit limit | Payment in one lump sum or as required |
| Cost structure | Interest only on the amount used, but usually higher interest rates | Fixed interest over the term |
| Credit check | Yes, but usually less strict than for loans | Yes, strict check of creditworthiness and collateral |
| Term | Unlimited, as long as within the credit limit | Limited, fixed term |
| Use | For short-term, unforeseen expenses | For planned, larger investments |
| Contractual agreements | Less formal, usually part of the current account agreement | Formal loan agreement with specific conditions |
Repayment of a Revolving Credit is flexible and without a fixed repayment schedule. Here are the main features and steps for repaying a Revolving Credit:
Repayment of a Revolving Credit is very flexible and is made through automatic and voluntary deposits into the current account. It is important to monitor the account balance regularly and make repayments as soon as possible to minimize interest costs.
A Revolving Credit is worthwhile if you need to bridge financial bottlenecks at short notice and flexibly, for example in the event of unexpected expenses or temporary liquidity bottlenecks, and you are sure that you can quickly make up the amount to avoid high interest costs.
The Revolving Credit should be around two to three times as high as your monthly net income in order to be able to react flexibly to short-term financial bottlenecks.
With a Revolving Credit, debit interest, possibly overdraft interest if the limit is exceeded and sometimes account management or processing fees are charged.
An overdraft facility is for private customers and a Revolving Credit is for business customers, both allow the account to be overdrawn up to a certain limit.
A supplier credit is granted by suppliers by giving you a payment term, while a Revolving Credit is provided by the bank to overdraw your account up to a certain limit.
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