Overdrafts and Personal Lines of Credit

Key takeaways

• Interest accrues only on the drawn balance, but fees usually apply on the limit.
• No amortisation schedule means no structural pressure to repay.
• The full limit counts as a liability when you apply for a home loan.
• Better suited to genuine timing gaps than to ongoing shortfalls.

How does revolving credit differ from a term loan?

The line fee matters and is often overlooked. Many facilities charge an annual or monthly fee calculated on the approved limit whether or not you use it, so an unused $20,000 facility is not free.

Why do balances persist?

Because nothing forces them down. A term loan has a schedule that retires the debt whether you think about it or not. Revolving credit requires a deliberate decision to repay, repeated every month, competing against every other use of the same money.

The behavioural result is well documented across revolving products: balances drift towards the limit and stay there, with the borrower servicing interest indefinitely. A facility taken out for a three-month gap can still be sitting at the limit five years later.

If you use one, set your own amortisation. Decide a fixed monthly repayment above the minimum, automate it, and reduce the limit as the balance falls so the room does not simply refill.

What does it do to your home loan application?

More damage than most people expect, because assessment uses the limit rather than the balance.

A $25,000 line of credit at a zero balance is assessed as though you owed $25,000, with a notional repayment deducted from your serviceability. It can reduce borrowing capacity by considerably more than $25,000 of home loan, because the assessed repayment on revolving credit is calculated at a higher rate over a shorter notional term.

The remedy is straightforward and worth doing well before applying: repay and formally close facilities you do not need, and reduce the limit on those you keep. Closing means a written closure confirmation, not simply a zero balance - the facility remains a liability while it exists.

Frequently asked questions

Is a line of credit cheaper than a personal loan?

Usually not. Revolving facilities generally carry higher interest rates than term personal loans, plus a line fee on the limit. They are cheaper only when you genuinely draw for short periods and repay quickly.

Does an unused overdraft affect my home loan?

Yes. Lenders assess the approved limit rather than the drawn balance, so an unused facility reduces your borrowing capacity. Closing facilities you do not need before applying can materially increase what you can borrow.

Can I get an overdraft on my everyday account?

Many banks offer small overdraft limits on transaction accounts, subject to assessment. They are convenient for short timing gaps but expensive as a persistent source of funds.

How do I get out of a revolving debt?

Set a fixed repayment above the minimum, automate it, and reduce the limit as the balance falls so the space does not refill. Consolidating into a term loan with a fixed end date is another route, provided you close the revolving facility afterwards.

Related reading

• Personal Loans: Secured vs Unsecured
• Credit Cards: Interest-Free Periods and the Real Cost
• Debt Consolidation Loans: When They Work

Sources

• Moneysmart - personal loans and credit — ASIC
• Credit licensing: Responsible lending conduct (RG 209) — ASIC