Formerly called revolving credit, has revolving credit become more acceptable? We took stock of revolving credit, its advantages and disadvantages and identify the cases in which it can be interesting.
Functioning of revolving credit
The principle of revolving credit is that monthly repayments gradually restore a right of future use. This is the reason why we call this type of consumer credit as well as reconstitutable credit, cash reserve or revolving credit. Here are the main principles that govern the functioning of revolving credit:
- Revisable taeg rate subject to wear and tear from 0% to 20.27%
- Monthly payment defined according to the repayment speed
- Amount of available credit that replenishes
- Amount: generally from 500 $ to 6000 $
- Duration: up to 60 months maximum
As much to put the feet in the dish right away, revolving credit rates are rather known to be expensive. And this was particularly the case in the era of revolving credit, before the new consumer credit laws * came into force. We will however see that it is a small loan which is sometimes very practical.
So that it does not cost too much, you must be able to reimburse it over short periods. This type of loan is made for that. There is no charge for early repayment. So the trick is to pay it back as soon as you can. And of course, you have to compare to opt for the best offer.
Compare revolving credit
Online revolving credit offered by all major credit organizations competes with that sometimes offered by banks. It is often associated with a name. There is thus the revolving Reserve Colors credit at Viloan (renamed by the way Agile Solution), Accessio at Bankate or Provisio at Astro Finance. All these financial companies want to be able to support their customers with this type of product which is generally quite profitable for them.
You must use a credit comparator to avoid ending up with revolving credit that is too expensive to repay. Our comparator was precisely designed to compare revolving credit with as much objectivity as possible. We have therefore defined criteria allowing to better understand the product.
- Revisable APR rate
It is obvious that this rate is decisive for obtaining the best offer. You should know that the organization can change the rate of revolving credit each month, on condition of notifying the client before. The customer can refuse. In this case, the revolving credit becomes credit repayable at the rate of the previous month until the debt is fully repaid. Then revolving credit is closed.
- Proposed reimbursement speeds
This is the factor that most influences the total cost of a loan. In fact, the faster you reimburse, the less there is to pay back. In addition, with many organizations, if one chooses to repay quickly, the rate of revolving credit is cheaper. The choice of the monthly payment of the revolving loan is therefore crucial.
- Application acceptance rate
The acceptance rate does not directly influence the cost of revolving credit. It is nevertheless decisive because if an organization offers an ultra low rate but does not accept 5% of requests, 95% of customers will always be looking for revolving credit at the best rate.
- Promotional rate
Last point that can influence the ranking, the promo rate is practiced in small doses for this type of loan. It is exceptionally offered for the first use at opening by certain companies.
The system that we have developed makes it possible not only to obtain a classification according to these different criteria. But then how do you know if the credit will be accepted? This is where our comparator stands out from the others.
Indeed, to avoid privileging the organizations which would be tempted to propose revolving credits at low rate but by refusing many files, our system makes it possible to obtain a response of principle on behalf of the least expensive organization. This response is given in real time. In this way, each client can know if his file can go to the best rate. If this is not the case, it is possible to query the 2nd best offer, and if necessary the 3rd.
When to take a revolving loan?
It is not because revolving credit is now called revolving credit that it has become more attractive. What has made it more interesting is the regulatory reforms. And in particular two points which made it possible to limit the risks of deviations.
- Revolving credit is subject to the same usury rates as amortizable loans
Before, the maximum authorized rate was different depending on the nature of the credit. Now, this maximum legal rate (usury rate) depends on the amount borrowed, regardless of the type of consumer credit.
- Reimbursement speed minima have been imposed
For any credit amount 3000 USD or less, the sum must be repaid in 36 months maximum. For any amount borrowed between 3000 and 6000 USD, the sum must be repaid in less than 60 months. No more revolving credit whose debt is only increasing because the repayment is not going fast enough.
What were the consequences of these changes for credit organizations and banks?
Overall, obtaining depreciable credit of less than 4,000 USD has become almost impossible. Up to 4000 USD, only revolving credits are offered. And when we find depreciable credits (auto credit, personal loan, work credit) for these amounts, the depreciable rates are as expensive as those of the renewable. And the acceptance rates for amortisable loans are much lower than those for revolving credit.
In other words, below a 5000 USD credit, the revolving loan is offered. But it is a bit logical because this type of loan is really intended to be a kind of cash credit, a one-off facility. The majority of requests concern a rapid revolving credit, which can be repaid as quickly as possible. In fact, unlike the depreciable amount, the revolving credit can be repaid at any time without any cost.
For example, it can cost much less than a bank overdraft, which not only will apply debt-based interest rates (subject to the same rate of wear), but also banks often apply processing fees.
Take a revolving credit to have a small monthly payment
Revolving credit is therefore a small credit almost by definition. But that’s not all. The argument most put forward when banks sell its benefits is the small monthly payment. Indeed, the revolving loan makes it possible to obtain monthly payments to be repaid very reasonable. For example, we have reproduced below the reimbursement scale offered by Franfinance.
The slow speed offers a reimbursement in 29 monthly payments of 21 USD and a final one of 18.17 USD at the revisable taeg rate of 20.26%. The cost of 127.17 USD. The rate is certainly significant but it should not be forgotten that this credit can be repaid in advance without any cost.
The monthly revolving credit payments are therefore small adjustable monthly payments. But that’s not all. They also have a huge influence on the rate. Indeed, the more you are able to repay a large monthly payment, the faster you can repay your credit. In this case, not only will the cost of credit mechanically drop a lot (we owe money for a shorter time), but in addition, organizations generally offer a cheaper revisable taeg rate for faster repayment.
Revolving store credit
It is or it was one of the markets that allowed to distribute the most revolving credits. Historically, this is where the bad reputation of revolving credit came from. Legal constraints have also been reinforced against the distribution of store credit cards.
Indeed, in the past, too many customers thought of taking a simple loyalty card and ended up with revolving credit. Now revolving credit has given way to revolving credit better regulated by law. And the ASF figures prove it, we went from a renewable credit production of more than 17 billion in 2008 to 10 billion in 2016.
However, revolving credit via brand name credit cards remains a solution that can be interesting from time to time. Indeed, it happens to be able to benefit from credit at 0%. In this case, the credit costs are borne by the brand that promotes it. However, these operations are offered over short repayment periods, generally 10 times. And on the other hand, future uses of the card will generally be at full pot rate, namely around 20%.