A revolving credit agreement is a type of credit agreement that allows individuals or businesses to borrow money up to an agreed credit limit. This credit agreement is also known as a revolving line of credit, revolving loan, or credit line.
Here are some frequently asked questions about revolving credit agreements:
1. What is a revolving credit agreement?
A revolving credit agreement is a type of loan agreement that allows the borrower to withdraw and repay funds during a specified period. The borrower can withdraw funds up to a predetermined credit limit, and interest is charged on the outstanding balance.
2. How does a revolving credit agreement work?
A revolving credit agreement works by allowing a borrower to draw funds from a line of credit when needed and then repay those funds as they become available. Unlike a traditional loan, the borrower doesn`t receive a lump sum of money at the beginning of the loan term but can access funds as needed.
3. What are the advantages of a revolving credit agreement?
There are several advantages to a revolving credit agreement, including flexibility, convenience, and cost-effectiveness. With a revolving credit agreement, borrowers can access funds as needed without applying for a new loan each time. The interest rate is typically lower than that of credit cards, making it a more cost-effective option.
4. What are the disadvantages of a revolving credit agreement?
The main disadvantage of a revolving credit agreement is that the interest rate may be variable and could increase over time. Also, if the borrower fails to repay the outstanding balance, the lender may reduce the credit limit or call the loan due.
5. How is credit limit determined in a revolving credit agreement?
The credit limit is typically determined by the lender based on the borrower`s creditworthiness, income, and other factors. The borrower can request an increase in the credit limit, but the lender may require additional documentation and a credit check.
In summary, a revolving credit agreement is a flexible and convenient option for borrowing money up to a predetermined credit limit. However, borrowers should carefully consider the advantages and disadvantages before entering into this type of agreement.