The personal loan is the simplest form of borrowing money. An amount can be withdrawn in one go. This loan will be repaid within a predetermined period. This duration varies from 6 to 60 months (longer durations are often possible in the case of renovations, for example). A personal loan is taken out with a one-off credit requirement. Interest is charged on the loan amount. That interest is added to the financed amount and the total amount must be repaid in fixed installments. The interest and the monthly repayments are therefore fixed. If a term of more than 60 months is set, it is customary for the interest rate to be revised after 5 years.
The main advantage of a personal loan is that the monthly installments to be paid are fixed. So you know where you stand. In line with this, it also applies that the debt is repaid at the end of the term and that can also be a nice idea.
The main disadvantage of the personal loan is the rigidity: it is virtually impossible to ‘borrow’ within the same loan. A sudden need for extra money can therefore hardly be met. In that case, a new loan must be taken out. Another disadvantage is that early repayment is generally fined, since the lender misses the interest over the remaining term. The amount of this loss of interest depends on the time at which the early repayment takes place. The sooner, the more expensive is the credo here.
In addition to the personal loan, a revolving credit, also referred to as continuous credit, is a form of financing that is chosen if extra spending room is required for a longer period of time. The exact spending limit is not known in advance. This occurs, for example, when a renovation has to take place or when the house is refurbished. A credit limit is agreed based on your income and other financial obligations. Up to the agreed limit it is free to withdraw and repay. You only pay interest on the outstanding balance. The interest rate of most revolving credit providers depends on the credit limit. The higher the limit, the lower the interest payable.
The interest rate may change in the interim. The monthly repayment is usually a fixed percentage (2%) of the credit limit, regardless of the amount that is withdrawn. A variable percentage can also be chosen for some lenders. Because the duration is not fixed in advance, you can determine how long the repayment takes. This implies that money can also be withdrawn every time – after a repayment, or if the limit has not yet been reached. It is less sensible to take out a revolving credit for buying items with a limited lifespan. A personal loan is then a more suitable form of financing. For example, with a revolving credit, the financing of your car will run longer than the period that you use the car.
The advantage of a revolving credit is primarily the flexibility, because repayments can be made and taken up again (provided that you remain within the agreed limit). Moreover, a revolving credit offers convenience, especially if expenses are spread over time. Then you do not always have to take out a new loan. In addition, the monthly costs are lower than with a personal loan, because the term is longer (indefinite).
However, these benefits can also be a major drawback: flexibility and ease require a certain repayment discipline. Whoever does not have the risk of never getting rid of the credit. Moreover, the interest on the revolving credit is often variable and the costs for the loan in question can become both higher and lower due to developments in the money and capital markets.
Current account credit
With a current account credit, a lender grants permission to be ‘red’ on a payment account up to a certain amount. The lender will of course check in advance whether your income is sufficient for the amount. Here, too, nothing needs to be repaid, as collateral is required for a current account credit. Securities and savings certificates are usually used as collateral.
The benefits of the overdraft facility lie in flexibility (as with the revolving credit), but also in costs. These are generally lower than with a revolving credit or a personal loan. Because the credit is linked to a payment account, the advantage is that the funds are available at all times (if the limit is not reached). Often a minimum mandatory repayment, such as with revolving credit, is not mandatory.
Just as with revolving credit, the advantages of this form can also be a major disadvantage: flexibility and ease require a certain amount of repayment discipline. Whoever does not have the risk of never getting rid of the credit. If one exceeds the limit of the current account credit, this is an unauthorized debit position, the costs charged for this are higher than the usual interest rate.