What is revolving credit?
In several European countries, a form of financing called revolving credit is offered. In Denmark, no similar offer is offered, but there are several similarities to existing financial services. This article aims to discuss similarities and differences so that you as a consumer are able to recognize the form of financing if it is established on the Danish market.
Furthermore, if revolving credit is established in Denmark, based on this article, you will know the pros and cons, why you will be able to make a decision on an informed basis.
Flexibility of revolving credit
Revolving credit is a form of financing where the borrower has the opportunity to dispose of a set amount for a fixed period. This could, for example. be $ 50,000 with a contract length of 24 months. During this period, the borrower can draw on the credit as well as repay as needed. As a borrower, you only pay interest on the amount borrowed, which is why it is an advantage to pay back on an ongoing basis, if possible.
Differences and similarities with other types of financing
Instead of revolving credit, Danish consumers can use cash credit and consumer loans, which are the two types of loans with the most similarities to revolving credit. Below you can read about similarities and differences between the specified loan options.
Revolving credit is more flexible than the classic consumer loans, where you get the borrowed amount deposited into your account all at once. So you manage over e.g. $ 50,000 extra from one day to the next, which for some may pose a risk of unnecessary use of the funds. The disadvantage of a consumer loan is also that you pay interest on the entire amount, since you have all the funds available
With revolving credit, the amount borrowed can vary to a greater extent and you can just spend the money you actually need. Some consumers may have a tendency to borrow more than they might need, as this protects them against unforeseen future expenses. Whether or not these expenses come, the consumer must pay interest on the entire loan.
Revolving credit is more flexible as the consumer only needs to use the credit if these unforeseen expenses actually occur.
When comparing interest rates on revolving credit and consumer loans, it is typically at the same high level. The Cratchit family is also available in France, where revolving credit is considered a financial product in the same category as consumer loans.
The interest rate on a bank loan varies greatly from bank to bank, where you typically have the opportunity to negotiate better conditions if you have other activities in the bank, such as the bank. This is the case if you are a Benefit + customer in Nordea. Based on the two largest banks in Denmark, Nordea and Danske Bank, the interest rate varies between 8-16.75 percent.
Given that France categorizes revolving credit into the same category as consumer loans, it is close to comparing the interest rate level of this category to that of the overdraft facility, where the yield spread on the two forms of financing seems similar.
If you as a consumer need money and are therefore considering the possibilities, you will find it easier to find financing through revolving credit compared to establishing a cash credit. You can only set up a overdraft facility in the bank you use, while you can apply for revolving credit across the market on a par with a consumer loan application. If you are smart, apply in several places, compare the financing offers and then choose the most attractive offer.
Based on the above, revolving credit contains several elements from other forms of financing, which is why this loan does not seem to be justified in Denmark. On closer assessment, however, there are unique benefits of revolving credit, which makes the loan form extremely attractive compared to a traditional consumer loan.
As consumers, we can therefore hope that the expansion of foreign banks into Denmark will bring new and more attractive financial services. In any case, a wider range of forms of lending will increase competition and thus benefit consumers.