Everyone has life projects of different sizes. To make these projects a reality, we need money. If you do not have your own funds, you can apply for a loan from a financial institution. Different types of credit are offered by credit agencies. Among the offers that are available on the market, we can mention the revolving credit. The latter is a type of credit that meets the need for cash. It finances all kinds of projects and can even be renewed. What is revolving credit? What are its particularities? How does it work ? How to get it? How to choose the best revolving credit? What are the precautions to take in choosing your revolving credit so you do not get scammed?
What is revolving credit?
Revolving credit is a special form of consumer credit. It constitutes a reserve of money made available to the plaintiff and which is accessible to him at any moment. Its use is not restricted. It is in the unrestricted credit category, so the borrower can use it as he wishes. The amount of a revolving loan can be used in part or in full. There are two main modes of use of revolving credit:
- The use of a credit card associated with the amount allocated;
- The use of a bank account associated with credit.
When a borrower opts for the credit card, the loan amount will automatically be made available. He will be able to use it to make his multiple purchases at the stores and stores. With the revolving credit associated with a bank account, the borrower can effect a partial or total release of the loan amount. The operation of this credit is framed by law to not only protect borrowers, but also lenders.
The revolving credit: several appellations, but only one official
Many expressions are used to refer to revolving credit. We can, among others, quote:
- Revolving credit;
- The reserve of money;
- Reconstructable credit;
- Permanent credit
- The account available.
The ambiguity of these different expressions can be a source of error or misunderstanding for consumers. In order to standardize the commercial terms for this type of loan, a single expression must now be used on offers and advertisements. This is the term “revolving credit”. This has been the case since the adoption of the Lagarde law in 2010. The adoption of an official title also aims to combat over-indebtedness.
Revolving credit: a so-called “replenable” loan
The revolving loan is classified as a revolving loan because it has the following characteristics:
- It is a loan that builds up as the borrower makes the repayments;
- It is a one-year loan that is replenished each year by tacit agreement …
In addition, the borrower has the option of terminating its revolving credit by preventing its replenishment.
What are the particularities of revolving credit?
In addition to the general regulation on consumer credit, the revolving credit must meet certain rules that are specific to it. These include:
- The duration of the contract, which must be of a year which may be renewable;
- Renewal of the contract at the end of the term must be proposed if the borrower has not received the cash reserve ;
- The contract is suspended if the borrower does not accept the renewal 20 days at the latest before the due date …
Principle and method of operation of revolving credit
At first glance, before applying for a revolving credit, the borrower must define the amount he / she needs. The lender for its part studies the loan file of the borrower before making available the amount requested. The amount the borrower receives can not exceed a given limit. This amount depends on:
- The financial situation of the borrower;
- Preferences of the borrower;
- The repayment capacity of the borrower.
The lender opens a special account on which is deposited the sum of money. Once the credit is obtained, the borrower can use it to make one or more purchases according to his needs.
Valid for a period of one year, the repayment contract defines the amount and terms of repayment. Interest to be paid only relates to the amount used in the cash reserve. The borrower must make regular repayments to the account. The goal is to have on the account, at the end of the schedule, a balance corresponding to the amount initially loaned. You have the choice between three types of monthly payments:
- A modest monthly payment that allows you to have better control over your budget;
- An average monthly payment to reduce the repayment period;
- A high monthly payment to replenish the reserve of money in a short time, even if it will strongly influence your budget.
It is possible to extend one year’s renewable loan if the repayment can not be made in the current year. Each month, the credit institution transmits to the borrower a detailed report on the status of his account. It is a document that should contain the following information:
- The amount of money available on the account;
- The start and end dates of the revolving loan;
- The amount corresponding to interest payable;
- The different interest rates applied, including the annual percentage rate of charge;
- All amounts already refunded;
- All amounts due and therefore still to be repaid;
- The estimate of the number of months remaining to make all the refund …
It should be noted that the cash reserve available to the borrower may decrease or increase depending on the evolution of his financial situation. A change in the amount of the cash reserve necessarily entails the signing of a new revolving credit agreement.
The revolving credit and the payment card
The borrower can use his revolving credit to make his purchases freely. Thus, the credit institution can make available a credit card linked to credit. With this card, the borrower can benefit:
- Different payment options;
- Assistance services;
- Various guarantees …
A card backed by a revolving credit allows for cash or credit payments. By opting for a cash payment, the holder can pay for purchases at the same time or within a reasonable time. If he chooses the payment on credit, the amount of the purchase will be deducted from the amount available in his revolving loan.
The card provided is an encrypted name card. Thus, before the validation of a payment, it is necessary to compose a 4-digit secret code. We distinguish different cards for a revolving credit:
- Private cards that can only be used in certain shops;
- Cards accepted in partner stores;
- Cards functioning as a bank card.
Private cards are used to make purchases from the partner brands of the lending organization or belonging to the same group. Loyalty cards also act as a credit card for:
- Department stores;
- Hypermarket chains;
- Companies specialized in distance selling …
As far as the cards accepted by the partner brands are concerned, they are quite flexible. In general, the major credit institutions are in collaboration with more than one hundred stores. As for cards that work like a bank card, they can be used in all stores or banners. These cards operate on the basis of a national interbank system and sometimes on an international network. The bank card backed allows to make all kinds of payments on the national territory and abroad. Transactions (purchase or withdrawal of money) are made within the limit of the amount of the revolving credit available on the card.
However, the following precautions must be taken when using the credit card. It is necessary :
- Keep a close eye on his map;
- Have a good command of its use;
- Check each time the amount that appears on the payment terminal before the validation of the operation;
- Enter the confidential code discreetly by protecting you from prying eyes …
In case of loss or theft of the credit card, the cardholder must immediately inform the credit institution. To avoid any fraudulent use, the interested party must oppose its use.
Amount and term of validity of the revolving credit?
Formerly limited to 21,500 USD, the amount available for revolving credit has increased through the Lagarde law. The amount of revolving credit now varies between 200 and 75,000 USD. Like any other credit, there is a period of validity or refund for a revolving credit. The repayment terms of a revolving loan used and an unused revolving loan are different.
The commitment period for a revolving credit used
If the borrower draws on the cash reserve placed at his disposal, he must repay the loan within a variable time depending on:
- The amount of the loan;
- The pace of repayment.
With the monthly statement of account issued by the financial institution, the borrower will have an idea of the number of monthly payments he has to pay. However, the law sets guidelines in determining the repayment term of the revolving credit used:
- The reimbursement period is 36 months maximum for the use of an amount less than or equal to 3,000 USD;
- The repayment period is 60 months at the most for the use of an amount exceeding 3,000 USD.
The commitment period for an unused revolving credit
If the borrower does not use the cash reserve for one year, the credit agency will send him the details of the loan conditions. This document must be sent no later than three months before the expiry date of the contract. In particular, he must specify:
- The amount of the credit always available;
- The annual percentage rate of charge (APR);
- The amount of refunds …
The suspension of the credit takes place if the borrower does not agree 20 days maximum before the due date. If a year later, the borrower still does not lift the suspension of the credit, the contract will be terminated.
The advantages and disadvantages of revolving credit
Revolving credit is a special form of consumer credit. It is a loan often solicited by individuals because of its multiple benefits. However, inappropriate management of the revolving credit account may be the source of some problems. Let’s take stock of the advantages and disadvantages of revolving credit.
The benefits of revolving credit
This type of credit allows you to always carry a significant amount of money. The latter can then be spent on daily expenses or contingencies. With revolving credit, you enjoy:
- Freedom in the use of allocated funds;
- Permanent availability of funds;
- Lack of justification for the use of funds;
- The possibility of using all or part of the funds allocated;
- The possibility of not even using the funds;
- Freedom in choosing the rate of repayment;
- The possibility of modifying the monthly repayments;
- The ease of payment with associated credit cards;
- The possibility of early repayment of all or part of the credit without paying compensation …
The borrower can also define, under conditions and according to the terms of the contract, the monthly installments that arrange it. In addition, interest is calculated only on the basis of the amounts withdrawn into the cash reserve.
The disadvantages of revolving credit
In order not to make his financial situation difficult, the borrower must be careful in using the revolving credit. Indeed, its flexibility of use and its ease of use make that:
- The interest rate applied to it is the highest of all types of consumer credit ;
- The tacit annual renewal of the loan can lead to a long repayment period if they are not effective;
- The accumulation of several credits can lead the borrower into a situation of over-indebtedness …
As a result, subscription to revolving credit is not recommended for people who are in an unstable or fragile financial situation.
Some obligations of the lender face-to-face the borrower
The code of consumption includes several laws that govern the revolving credit. It is :
- The Lagarde law of July 1, 2010 which reinforces the protection of the credit applicant;
- The law Châtel of January 28, 2005 which imposes a new offer if the amount of the credit must be increased;
- The Neiertz law of 31 December 1989, which prevents difficulties relating to over-indebtedness and settles disputes between the parties;
- The Scrivener Law of January 10, 1978, which organizes the protection and information of credit applicants.
Revolving credit is strictly regulated by law. Indeed, several measures are instituted to protect the various parties involved in this type of credit. Thus, the code of consumption stipulates in its articles L.311-1, L.311-2 and L.312-4 that:
- The credit obtained must be intended to finance the private and family needs of the borrower;
- The amount of the loan must be between 200 and 75 000 USD;
- The repayment term of the loan must be greater than 3 months;
- The credit agency or lender must be a licensed professional.
In order for the applicant to be sufficiently informed about credit conditions, the law also regulates advertising campaigns. In fact, to encourage consumers to use revolving credit, credit agencies use many means, including:
- The radio ;
- Magazines ;
- The Web…
On advertisements, Articles L.312-5 and L.312-6 require clear and visible precision of the following mandatory information:
- The borrowing rate of the loan;
- The fixed, variable or revisable nature of the interest rate;
- Details on fees included in the total cost of credit;
- The total amount of the credit;
- The annual percentage rate of charge (APR);
- The total amount owed by the credit applicant;
- The amount of the maturities that can not be less than 15 USD;
- A credit commits you and must be repaid. Check your repayment capacity before you commit. “…
Of course, this last mention can not be displayed for a broadcast advertisement. We must also find on the ad a representative and quantified example of credit proposed. If the credit institution requires the borrower to purchase insurance, he or she must specify this in the advertisement. It is also important to specify in the ad whether or not the cost of insurance should be included in the monthly payments.
The code of consumption in its article L.312-10 forbids to mention in an advertisement that:
- The granting of credit does not require the provision of information to assess the financial position of the borrower;
- Obtaining the credit improves the financial situation, increases the resources, makes it possible to have at the moment a reserve of money without compensation;
- Refunds can sometimes be made on maturities greater than three months …
As with other consumer credits, the borrower can withdraw 14 days after accepting the credit offer. This provision is provided for in Article L.312-19 of the Consumer Code. If the fourteenth day is a Saturday or a Sunday, the deadline is extended to the next business day.
Prior Offer and Revolving Credit Agreement
The lender has a duty to provide the borrower with a prior offer if the borrower wishes to subscribe to a revolving credit. A prior offer will also be given to him whenever he wishes an increase in the amount of the credit. Still called a pre-contractual fact sheet, the prior offer must summarize all the information in the credit agreement, including:
- The date of dispatch of the offer;
- The identity and address of the lender and if possible those of the intermediary;
- The accuracy of the type of credit;
- The total amount of the loan;
- The conditions for obtaining credit;
- The duration of the loan contract;
- The amount of monthly payments;
- Number and frequency of deadlines;
- The total cost of credit;
- The annual percentage rate of charge (APR) illustrated by an example;
- The notification of the existence of the right of retraction …
The borrower will also benefit from further explanation of the features of the contract offered to him. All these explanations will enable him to know if the offer is adapted to his needs. It also allows the borrower to know the risks involved and to prevent over-indebtedness.
If it is a revolving credit of more than 1,000 USD and intended for the purchase of a good or service, the lender must:
- Offer the borrower a cheaper alternative (amortising credit, personal loan …);
- Specify the resources and take into account the repayment capacity of the borrower;
- Fill in the “dialogue form”.
Verification of the creditworthiness of the borrower
The credit check of the borrower is imperative before the signing of the credit agreement. For this purpose, the lender will ask the borrower to provide him with certain information and proof of his financial situation. The dialogue sheet, for example, is a document that evaluates the creditworthiness of the borrower. She gives information on:
- The resources of the borrower;
- The charges of the borrower;
- Other loans to which the borrower has subscribed …
The lender will also learn from his side about the legitimacy of the borrower including consulting the FICP. The FICP is the national file of credit repayment incidents to individuals. The verification of the creditworthiness of the borrower is also carried out:
- Whenever the borrower requests an increase in the amount of the credit;
- Every three years if the borrower continues to benefit from the revolving loan.
Thus, if the lender considers the credit applicant credible, he can proceed to the conclusion of the contract.
The signing of the revolving credit agreement
To conclude the initial credit agreement, the lender must give the borrower the final credit offer. It is a document written on a durable medium that must be delivered with at least one copy. The presentation of the credit agreement may vary from one financial institution to another. However, all credit agreements must contain the following information:
- The identities and geographic addresses of the parties involved (borrower, credit institution and possibly the intermediary);
- The date of submission of the offer and the expiry date of the offer;
- The terms of repayment of the credit (by check, direct debit or other means);
- The amount of the credit and the terms of its use;
- The duration of the credit (1 year renewable);
- The cost of the credit (the rate indicated is revisable because it depends on the use that will be made of the money reserve);
- Guarantees as well as insurance contracts …
If the contract is signed by two people, then they are co-signers and co-borrowers. In this case, the refund can be made by one of the signatories, or both at the same time. Insurance is optional, but some credit agencies may require it. If insurance has been contracted, the following information will be included in the contract:
- The name and address of the insurer;
- The duration of the insurance contract;
- The guarantees provided by the insurance;
- Exclusions …
The final offer of the revolving credit agreement will also include information on the conditions:
- Acceptance of the credit agreement;
- Contract withdrawal;
- Early repayment of the credit;
- Termination of the contract.
It will be mentioned in the contract the consequences to which the borrower is exposed if he does not repay the loan. A section concerning the treatment of disputes between the parties involved is also included. It is therefore very important to read the contract carefully before signing it. Above all, check whether the included clauses are suitable for your requirements. For more details, the borrower can contact the lender. In case of doubt, he can always assert his right of withdrawal.
Is it possible to modify the credit agreement after signing?
It is indeed possible to modify the credit agreement after its signature. The borrower can indeed request at any time during the period of validity of his contract:
- The reduction of the amount of his revolving credit;
- Suspension of his right to puncture in the money reserve;
- The termination of his loan agreement;
- The transformation of revolving credit into a conventional loan …
The reduction of the credit amount is very convenient. The suspension of the cash reserve implies that the borrower will no longer have access to the cash reserve. Reducing or suspending cash allows the borrower to avoid using more money than needed. He can therefore repay the amount already used without fear of getting into debt.
If a portion of the credit has been used prior to the termination request, the borrower is obligated to repay it. The refund will be made according to the terms of the contract. It is also possible to change the monthly payment initially provided for in the credit agreement. Such an amendment can not be effective without the agreement of the lender. The increase or decrease in monthly payments varies according to the credit agreement.
The cost of a revolving credit?
It is difficult, if not impossible, to know when you subscribe to the revolving credit. Indeed, the interest on the credit is calculated according to the use that will be made and the rate of reimbursement. Thus, even if the interest rates charged are high, it is the behavior of the borrower that generally influences the cost of credit. Here are some details that will help you better understand and control the cost of a revolving credit!
Very high interest rates approaching the rate of wear
The particularity of revolving credit is that it is characterized by a revisable interest rate. Credit institutions must take into account benchmarks to set the APR. The APR is composed of:
- The nominal rate that makes it possible to calculate the interest actually received on the loan;
- Case study fees estimated at between 1% and 1.5% of the credit amount;
- Possible contributions for insurance …
The benchmark is none other than the average of the rates applied in Europe. This index may decrease or increase. We therefore note that most of the interest rates applied are modeled on the rates of wear that vary each quarter. This is mainly due to the higher or lower risk of non-repayment of the debt. The interest rate is also a function of other parameters such as:
- Slices used in the money reserve;
- The speed of repayment of the credit;
- The duration of the loan.
To benefit from a lower APR, do not anarchically puncture in the money reserve. In addition, the repayment term should not be extended and shorter durations of 36 months should be preferred. Note that the lender has the duty to warn the borrower of the rate change. This change does not result in an increase in monthly payments because the debt can be deferred. The borrower can oppose the change in the interest rate. This will result in the cancellation of the contract and the repayment of the credit according to the original conditions.
Payment of small monthly payments
Small monthly payments have the advantage of being less restrictive. However, this implies the extension of the credit repayment period. And the extension of the credit period unfortunately rhymes with a more expensive credit. It is therefore in the interest of the credit institution to offer the borrower the payment of small monthly payments. To benefit from a cheaper loan, the borrower must take the initiative to increase his monthly payments. It may also abuse to the extent possible the prepayment. The goal is to minimize the repayment term and therefore the cost of credit.
The share of insurance in the cost of credit
Do not neglect the expense of subscribing to borrower insurance. In general, insurance expenses are estimated at about 10% of the amount loaned. Adding this to the 20% representing the APR, this makes a total of 30%. The borrower will therefore be responsible for approximately 30% interest payable in addition to the amount of the credit. This is a very important amount, which is why very few lenders require insurance underwriting. The borrower therefore has the heavy responsibility of choosing between:
- Subscribing to insurance to protect yourself in the event of a hard blow, while paying interest close to 30%;
- Subscription to a credit without insurance that does not protect against hardship, but limits the cost of credit.