Overdrafts and Revolving Credit: What You Need To Know

…do you actually know how much interest you’re paying on a your overdraft? Well, you think you do. I used to work in a casino, and have seen countless people lose everything. It works like this: The machine pays out 70% of all monies received over a million spins. However, as we win, we put the money back into the slot machine. this means of the 70%, we only win 70% of the 70%, and so forth. 

This is how revolving credit works in short.

The end.

But if you want to read on, here is a bit more in-depth information.

Debt is very much about convenience, and revolving credit and your overdraft aligns perfectly with this. Revolving credit facilities also offer flexibility to borrowers. Unlike traditional term loans or personal loans, revolving credit facilities allow individuals or businesses to access funds, repay them, and re-borrow within a predefined credit limit.

Revolving Credit vs a traditional loan

Compared to traditional personal loans, revolving credit facilities differ significantly. While personal loans involve borrowing a fixed sum and repaying it in fixed monthly instalments, revolving credit facilities resemble credit cards or overdrafts. This similarity allows multiple uses of the credit line if payments are consistently made. In short, revolving credit offers:

  • Flexibility in Repayments and Borrowing: These facilities enable borrowers to make additional repayments at any time and access the repaid funds without reapplying for credit. Borrowers can repeatedly utilize the funds within the credit limit once a certain percentage of the loan amount has been repaid, usually around 15%.
  • Open-ended Term with Variable Interest: The loan term remains open-ended, and the interest rate is determined based on credit scores and affordability. Interest rates can fluctuate over time, affecting the cost of borrowing.
  • Versatility in Repayment Methods: Borrowers often have the option to choose between variable repayments, paying based on what they use, or fixed repayments that remain constant.

Pros and Cons of Revolving Credit Facilities:

Anyone who knows me, knows I despise any debt outside of investment property debt. However, having something like an overdraft can be convenient, especially if you need to bridge some cash that is due to be paid in a week.

Pros of revolving credit

  • Ongoing access to credit without requiring a new loan application.
  • No new application fees for extending your loan.
  • Flexible terms allow for diversified fund usage.

The disadvantages of a revolving facility

  • High-interest costs: Accumulating interest charges can be significant, especially if only minimum payments are made or if the balance isn’t managed carefully.
  • Debt cycle risk: Continuous borrowing and repayments without a fixed schedule can lead to a cycle of perpetual debt, making it challenging to pay off the borrowed amount entirely.
  • Credit score impact: Misusing or maxing out the credit limit can negatively affect the borrower’s credit score, impacting their ability to access future loans or credit.
  • Fluctuating interest rates: Changes in interest rates can increase borrowing expenses, potentially making it more expensive to repay the debt if rates 

Banks offering revolving credit facilities 

ABSA: Absa offers a Revolving Credit Facility with a minimum credit limit of R5,000 and terms of up to 72 months. You can apply online, at a branch, or through their call centre.

FNB: FNB’s Revolving Facility is attached to your cheque account and offers flexible repayments. You can qualify with an active FNB cheque account and good credit standing.

Standard Bank: Standard Bank’s Revolving Loan provides credit up to R300,000 with flexible repayment terms. You can get an instant quote online even if you’re not a Standard Bank customer.

Nedbank: Nedbank offers a Personal Loan with overdraft functionality, essentially acting as a revolving credit facility. You can manage it through their banking app or online portal.

Capitec Bank: Capitec’s Access Facility provides credit limits of up to R75,000 with convenient access through their app or in-store.

Discovery Bank: Discovery Bank offers a Revolving Access Facility linked to your Discovery Bank account. You can earn Vitality points on your spending and get flexible repayment options.

African Bank: African Bank offers a Flexi Loan, which functions as a revolving credit facility, with lower loan amounts and potentially higher interest rates than larger banks.

These facilities operate similarly to a renewable type of loan. Borrowers can make multiple withdrawals and repayments within the agreed-upon terms.

Example Scenario:

Let’s say John applies for and is approved for a R100,000 revolving facility from his bank.

Initial facility amount: R100,000

Interest rate: 10% per annum

  1. John initially withdraws the full R100,000 limit, accruing a balance of R100,000.
  2. After making repayments totalling R25,000:
  3. Interest accrued over 2 months at 10% per annum: R2,000
  4. New Balance owed: R100,000 (initial) + R2,000 (interest) – R25,000 (repayments) = R77,000
  5. John chooses to re-borrow the R25,000 paid down:
  6. Previous balance: R77,000
  7. Additional withdrawal: R25,000
  8. Interest accrued over 1 month at 10%: R1,002
  9. New balance owed: R77,000 (previous balance) + R25,000 (withdrawal) + R1,002 (interest) = R103,002

Conclusion

Revolving credit – an overdraft or special loan is powerful. Though not 100% revolving credit, something like a flexi bond can be highly convenient where you can withdraw and deposit to pay less interest. Making sure that you manage your short-term (evil) debt is vital to being financially healthy.

Please don’t make debt because you can.

Happy investing!

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