You may be familiar with the terms, but do you understand the difference and do you know what option suits you best?

The whole point of revolving credits and offset loans is to save you interest through ‘offsetting’. We’re actually quite lucky in New Zealand to have these types of products because not all countries do. Both of these types of products save you interest, but they do it in different ways.

Revolving credits:

Having a revolving credit loan is like having a really large overdraft. You have the one account that your income can go into and your bills and loan repayments can be deducted from this same account. You can have a debit card for this account and you can use it like any type of transactional account. The interest you pay is calculated daily based on the balance of your account. So the more money you have in the account the less interest you pay. You can make lump-sum repayments and redraw money up to the loan amount limit.

Advantages:

• Some lenders can reduce your credit limit each month, which can help you pay off your loan within a specific term.
• There are no fixed repayments, which can be good if your income fluctuates.
• Adding any savings into this account (rather than a separate savings account) gives you bigger interest saves and avoids the tax on savings account interest.
• If you are disciplined, you can pay off your mortgage faster

Disadvantages:

• All your funds are mixed in together. If you have funds for different purposes it’s hard to keep track of this as it is just one big account.
• If your revolving credit loan is too big you may not have enough funds to offset with and you’ll therefore pay more interest as revolving credit loans are on the higher floating interest rates

Things to consider:

You need to have self-control and avoid the temptation to spend up to the credit limit – as this will keep you in debt for longer.