Financial Wellness

Personal Finance: the revolving lines of credit

It seems to be false that credits are designed to harm you

Personal Finance: the revolving lines of credit 

A revolving line is a lionized credit that allows the lender to re-spend each and every payment at any time. Such instruments steer overall consumption, which dovetails with the bullish expectations for the 2017 holiday season. The banking engagement may come to the benefit or affliction of a client’s personal finances.

The product’s main sponsors in Colombia are Citi, BBVA, Bancolombia, Banco Caja Social, Davivienda, Banco de Occidente, and Compensar. The ability to access the credit usually costs around $4 dollars a month until an initial withdrawal is carried out.

Expectable interest rates for revolving lines of credit range from 1.65% per month or 21.70% per year up to 2.30% per month and 31.42% per year from 1 to 5 years, on average. In case of default, Colombia’s maximum legal yearly rate of 31.44%is often applied.

An example

A 25-year-old that works at FedEx takes a USD $1,000 revolving line of credit; an annual 25.41% interest rate is applied. Additionally, the endowed acquires the responsibility to pay around USD $30 per month during 60 months at the most.

An investor

Suppose that the 25 year old took the revolving credit under the established conditions on December 20, 2016, and bought an Amazon stock for its listed price of USD $750.

The investor’s USD $1,000 portfolio is now worth of a USD $750 stock and USD $250 in cash. The banker would use his portfolio’s monetary supply to pay the monthly duty of USD $30 dollars up to the eight month.

At the end of the eighth month, the capitalist will have an Amazon stock, USD $10 dollars in hand and USD $906.31 in debt. Since a revolving credit allows it’s user to re-use the paid acknowledgment, the investor has the chance to withdraw up to USD $93.69 so his total liability rebounds towards USD $1,000.

The financier withdraws an additional $80 dollars and adds his remaining $10 dollars to the cash pile so 3 more monthly fees can be paid. At the end of the 11th month, the strategist has one Amazon share, no cash, and USD $952.02 in obligations.

By selling the Amazon stock at a November the 20th, 2017’s price of USD $1,126.6, the debt is erased and a USD $174.58 profit is seized.

A consumer

An alternate 25 years old that works at FedEx also took a revolving line credit and spent USD $1,000 on Amazon Prime’s products. If the individual considers that paying at least USD $30 dollars per month is accessible then he won’t be making any money but will have a good time.

Nevertheless, the buyer will pay up to USD $1,800 dollars for a USD $1,000 value.

In the end, it’s up you to either become  an investor or a shopper.


Latin American Post | David Eduardo Rodríguez Acevedo

Copy edited by Susana Cicchetto

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