Revolving loan, cash or overdraft? Which loan is better?

by Peter Clark

The financial offer of banks is very rich, thanks to which we, as customers, can choose between various products that are intended to give us an extra cash injection. The most popular form of such financing is cash loan, however revolving credit and overdraft on the account give similar possibilities. How do they differ and when is it worth reaching for them?

Cash loan – characteristics

Cash loan - characteristics

The cash loan is undoubtedly the standard financing offer that is most often used. To get it, you usually need to meet certain conditions set by the bank, including having adequate creditworthiness and credit history . It can be granted for both smaller and larger amounts, with a repayment period of up to several years. When should you reach for it? Choose a cash loan when you need cash, with small amounts, the verification time is usually not too long. There is also an option with a loan for a statement, which, contrary to appearances, is quite a common offer in banks. The liability is repaid in predetermined installments and at the appointed time.

How does a revolving loan work?

How does a revolving loan work?

Another name for a revolving loan is a credit line , which, as in the case of a standard cash loan, requires the signing of an appropriate contract with the bank. A big plus is that the formalities necessary to meet are relatively small. The only requirement is to have an account at the bank where such funding is requested. The loan is assigned to our settlement account and its amount is determined on the basis of our creditworthiness. What’s more, it starts only when we fully use our own funds, then we reach the limit granted by the bank.

Each new payment into the account goes to repay the obligation. The credit limit agreement is usually concluded for a period of 12 months with the option of its subsequent extension. If we want to have constant access to cash , without having to apply for a loan if necessary – it can be a good solution for us.

Account overdraft – what is it and how does it work?

Account overdraft - what is it and how does it work?

Overdraft is often confused with revolving credit, and although both products work on a similar principle, there are quite significant differences between them. First of all, the debit limit on the settlement account is usually for lower amounts and amounts to no more than several thousand dollars, but each bank sets its own rules. Like a revolving loan, it is activated when the customer withdraws more from the account than he has on it. The repayment of the liability is the same – it takes place every time money is credited to the account (e.g. from withdrawal). The difference is also the way of inference – there are even less formalities to fulfill than with a revolving loan (all you need to do is present an account statement to confirm the stability of your income), the whole procedure takes less time and can be done via electronic banking.

Which loan should you choose?

Which loan should you choose?

As you can see, there are many forms of credit and each of them has its pros and cons. The most popular is standard cash loan , but it also has the most formalities and requirements, at the same time it is also the safest – we get money once to use it in any way.

The revolving loan and overdraft on the account are slightly different, but the way they work is basically similar – we get a certain limit on the settlement account (with credit it will be greater than with overdraft) and we have access to money at any time, without having to use every time, and only for specific needs. This saves time, because you do not have to run around the banks with loan applications – the contract is signed once and uses the available funds for a specified period, for this only pays off as much as it seemed.

Risk? Easy access to cash may tempt you to be too wasteful and thus expose us to financial trouble when the amount of debt significantly exceeds our monthly account inflows. Therefore, when thinking about choosing the form of financing , let’s think about what we really care about, how much money we need, and how quickly we want to have access to cash.