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revolving credit

A revolving credit is a financial arrangement in which a bank or other lending institution allows a business or individual to borrow funds for purchases or investments as they require them.

Revolving credits work like credit cards. The lending bank guarantees a maximum amount that can be loaned to the customer. Whenever the customer draws on this credit, the amount that they borrow is subtracted from the maximum amount. Periodically, and normally at the end of each month, the customer is obliged to pay off their debt, plus the interest rate, and then they are free to borrow up to the maximum amount again.

The business or individual pays a commitment fee to the lending institution for this kind of credit.

If the borrower fails to re-pay the debt by the scheduled deadline, the lending institution applies interest rates to the unpaid amount. These can range from 10-30%, and can create a considerable snowball of debt and a possible credit risk.