Question

Compare and contrast an informal line of credit with a revolving credit agreement.

Answer 1

Meaning: A revolving credit agreement is an arrangement of credit where credit limit is set upto a credit limit. In this,credit facility can be availed over and over again until the lender or borrower closes the account after the credit amount is fully paid off.

An informal line of credit is a one time arrangement of credit facility to borrowers. When the credit amount is paid in full with interest, the lender closes the account.

Flexilbility: A revolving credit agreement is more flexilble in terms of payment than an informal line of credit.

Discretion: In revolving credit agreement it's borrowers discretion to use and reuse the account upto a certain credit limit. Whereas, in informal line of credit, there is less discretion on the part of borrowers as credit is availed one time and account is closed after full payment.

Credit limit: In revolving credit arrangement, borroewer's credit limit can be increased if he is consistent with the payment. Whereas, in line of credit credit limit is not increased.

Examples: Credit cards are an example of revolving credit agreement which has a credit limit.

Example of line of credit is overdraft facility which charges interest if the facility is availed.