Loans and Credit

credit loans

A swingline loan is a financial loan made by a banking institution. The loan grants organizations access to large amounts of cash to cover possible shortfalls from other debt commitments. It is seen as short term, operating for no more than five to 15 days on average, and is also a form of revolving credit that can be drawn upon as needed.

The purpose of a swingline loan is to provide cash quickly that can be used to cover other debt obligations. While a swingline loan is similar to other lines of credit in function, the funds provided by this type of loan are only to be used for paying other debts and not for other purposes such as asset acquisition or product research. This differs from a traditional line of credit that can be used for any purpose, including the purchase of goods or services along with debt repayment.

You could compare a swingline loan to a traditional line of credit or demand loan, as a swingline loan gives companies immediate access to large sums of cash on short notice just like the other options, but the use of the funds are more restricted than through the other mechanisms. Swingline loans are best suited for use in times where normal processing delays make other forms of loans less ideal.

Swingline loans may be acquired by both businesses and individuals. For individuals, a swingline loan may serve a similar function to a payday loan, (merchant cash advance), providing cash quickly but often at higher interest rates than other forms of credit. For businesses, they are most often used to cover temporary shortfalls, such as when anticipated incoming funds have been unexpectedly delayed.

Revolving Credit

Revolving credit involves a loan or line of credit that can be used repeatedly. Though it normally has an upward limit, as long as the funds are paid back as agreed, they can be withdrawn as needed on very short notice. Often, funds can be received on the same day they are requested, and the cycle of repayment and withdrawal can continue as long as all conditions of borrowing are met and both parties choose to keep the line open.

Revolving credit lines can be closed at the discretion of the borrower and the lender. This allows lenders to close lines of credit that have experienced elevated risk, or borrowers to close accounts they no longer intend to use.

Revolving credit is a line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes and can fluctuate each month depending on the customer’s current cash flow needs. Revolving lines of credit can be taken out by corporations or individuals.

Revolving Credit vs. Installment Loan

Revolving credit differs from an installment loan, as the installment loan has a fixed number of payments over a set period of time. Revolving funds only require payment of interest plus any applicable fees.

Revolving credit implies a business or individual is pre-approved for a loan. A loan request and credit reevaluation does not need to be completed upon utilizing revolving credit. For this reason, revolving credit is intended for shorter, smaller loans. For larger loans, financial institutions require more structure including installation payments.

Open-End Credit

Open-end credit is a preapproved loan between a financial institution and borrower that may be used repeatedly up to a certain limit and can subsequently be paid back prior to payments coming due. The preapproved amount will be set out in the agreement between the lender and the borrower. Open-end credit is also referred to as a line of credit or revolving line of credit.

Open-end credit agreements are advantageous to borrowers, as they exert more control over how much they borrow and when. In addition, interest is not usually charged on the part of the line of credit that is not used, which can lead to interest savings for the borrower compared to an installment loan.

Open-end credit often takes one of two forms: a loan or a credit card. Within the consumer market, credit cards are the more common form as they provide flexible access to funds and are immediately available again once a payment is received. A home equity line of credit is one of the more common loan forms in the consumer market, allowing borrowers to access funds based on the level of equity in their homes or other property.

On the business side, a line of credit loan may use different metrics to determine the maximums. These can include information regarding a company’s value or revenue, or it may also be backed by a form of collateral, such as real estate assets and the value of other tangible goods held by the organization.

Line of Credit Loans vs. Closed-End Loans

In both the consumer and business sectors, the main difference between a line of credit and a closed-end loan involves how the funds are initially distributed and if they can be reused as payments take place. While both will have a maximum dollar amount allowed, known as the credit limit, the loans function in different manners.

In a closed-end, also referred to as an installment, loan, the total amount of the loan is provided to the borrower upfront. As payments are made toward the balance, the balance owed decreases, but it is unlikely those funds can be withdrawn a second time. This is what prevents a closed-end loan from being considered a revolving form of credit.

With a line of credit, the full amount of the loan is available once it is granted. This allows borrowers to access as much or as little as they want depending on their current needs. As the balance owed is paid down, borrowers can also choose to withdraw the funds again, making the line of credit revolving in nature.

The Difference Between A Loan and A Line of Credit

Standard loans and lines of credit represent two different methods of borrowing money for both businesses and individuals. Typical loans might include mortgages, student loans, auto loans or personal loans; these are one-time, lump-sum extensions of credit that tend to be paid down through periodic, consistent installments. Lines of credit are usually seen with business lines of credit or home equity lines of credit (HELOCs); a borrowing limit is extended to a consumer, and funds can be borrowed again later after the money is repaid. There are sometimes non-revolving lines of credit, but most do not have an end date.

There are plenty of general differences between loans and lines of credit. Bigger-ticket debts such as a house or car tend to be made through standard loans. Standard loans are more likely to be secured against an asset. Lines of credit tend to have higher rates of interest and smaller minimum payment amounts. Lines of credit usually create more immediate, larger impacts on consumer credit reports and credit scores. Closing costs, if any, are higher for loans than lines of credit on average.

Two major differences between these two borrowing methods involve the when and the what for. If you are approved for a loan, you receive the full loan amount right away and usually begin accruing interest on those funds immediately. If you are approved for a line of credit, you receive the ability to borrow up to a certain amount right away, but you are not going to receive a large check or money transfer up front. Interest accumulation only begins once you actually make a purchase against the credit line. Many loans also require a specific purpose; for instance, you take out a student loan to pay for higher education, you are granted a mortgage to buy a property, etc. Lines of credit, however, do not typically have a specific purchase purpose. Purchases can be made on a variety of items without the lender’s approval, and no assets have to be appraised.

In this way, lines of credit represent a much more flexible borrowing tool. Payments also tend to be much more flexible for lines of credit, since the amounts and dates of purchase are uncertain. This uncertainty is offset by higher rates of interest and, sometimes, higher lending standards; it is very difficult to obtain an unsecured line of credit for any substantial amount.

Lines of credit act very similarly to credit cards, though they are not identical. Unlike credit cards, lines of credit can be secured with real assets such as a home. While credit cards always have minimum monthly payments based on a percentage of current credit balances, lines of credit do not necessarily include monthly payment requirements. Some individuals even take out personal installment loans to pay off lines of credit as a way to build their credit score. In this way, the two forms of debt can be used to complement each other.

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