Often considered as a generator of household over-indebtedness, revolving credit should be handled with care. It is also strictly regulated by law to best protect the interests of the borrower. Reminder of the legal framework and good attitudes to adopt in order to avoid unpleasant surprises!
Revolving credit: enhanced borrower protection
By subscribing to a revolving credit the borrower enjoys, as for other consumer credits, a period of 14 days to reconsider his acceptance of the loan offer.
Article D312-28 of the Consumer Code provides that the minimum repayment term is € 15, regardless of the amount of the loan used. Each deadline must include the repayment of a share of the capital.
The maximum duration of the revolving loan, whether or not it is secured by insurance, is strictly regulated according to the amount of cash granted to the borrower. She is of :
- 36 months for loans of € 3,000 or less.
- 60 months for amounts over € 3,000.
Similarly, when a credit card is associated with the revolving loan, it must be marked “credit card”, in legible characters. In addition, no promotional benefit provided by this means of payment shall be linked to the use of the revolving credit.
Revolving credit: real risks that remain
Despite the reform of some aspects of revolving credit, risks persist and need to be closely monitored. This explains why revolving loans are involved in 70% of debt overhang in 2015, according to a study conducted by the Banque de France. Once the line of permanent credit is open, the borrower can draw from it what materialize his projects without any justification being requested. Consequently, the flexibility that characterizes the use of this type of borrowing can encourage the consumer to make unthinking purchases. Then, the borrower may be tempted to use the reserve, even though his repayment capacity has become insufficient, as in the case of unforeseen events (accident, illness, unemployment, etc.). The consumer is exposed in this case to a real risk of over-indebtedness. Given its specificities, this method of financing therefore requires a lot of caution on the part of the borrower.
Revolving credit: a high cost to complex calculation
Flexible, easy to use, with repayable monthly payments, the revolving credit offers certain advantages for the consumer. The other side of the coin is that the lower the monthly payments, the higher the rate, and the more expensive the credit.
Interest rates on the revolving credit are much higher than those proposed for amortizable loans. They are also generally close to the rate of wear defined by the Banque de France.
Moreover, the final cost of the permanent loan is impossible to know in advance:
- on the one hand, it is revisable annually according to the fluctuations of the financial markets;
- on the other hand, it varies according to the amount used, the frequency of use and the duration of the loan.
Difficult under these conditions to have an overall vision on the plan of amortization of this credit.
Revolving credit: the good habits to adopt
Before subscribing to a revolving credit, the borrower must, as far as possible, favor traditional forms of borrowing (assigned loan or personal loan). If not, he will have to avoid a revolving credit with too low monthly payments. And think of transforming it, as far as possible into conventional consumer credit, at the annual renewal of the contract. Anyway, the faster the borrower will repay his permanent credit, and the lower his cost will be.
If the consumer uses revolving credit, he must know that the borrower insurance is optional. If such a solution is advised by the lender, the borrower remains free to subscribe to the insurance of choice by choosing the organization that best suits his needs. In this case, two types of insurance are offered:
- death and disability insurance;
- job loss insurance.
Evaluate effectively the offers of revolving credit
If the revolving credit meets an urgent need for cash, the borrower must be able to evaluate the offers of the lenders by comparing:
- the annual percentage rate of charge (APR);
- management costs or file fees;
- the cost of the loan insurance and its conditions.
In addition, to the extent that the revolving credit interest rate is recalculated each year, the lender must inform the borrower of the Global Effective Rate (APR) applied:
- in the initial loan offer;
- at the annual renewal of the loan agreement;
- every month through the statement of account.