An evergreen loan, also known as a revolving loan, is a type of open-ended loan that can be borrowed repeatedly through a certain period of time. The borrower can take out funds, repay them, and take them out again as needed, so long as the total doesn’t exceed the maximum limit.
Evergreen loans are popular for businesses and individuals who need ongoing access to credit for fluctuating capital needs, rather than a single lump-sum amount at one time.
One of the most common types of evergreen loans is a credit card. When you use a credit card, you borrow money up to a certain limit, pay it back (often with interest), and then borrow again.
Another common type is a home equity line of credit (HELOC), where a homeowner can borrow against the equity in their home, repay the money, and then borrow again.
For an evergreen loan to remain “evergreen,” or open for borrowing, the borrower must stay current on interest payments and may also be required to pay a portion of the principal over time. The terms of the loan, including interest rates and minimum payments, are laid out in a credit agreement.
Example of an Evergreen Loan
Let’s consider a common type of evergreen loan – a credit card.
Let’s say you apply for a credit card and get approved with a credit limit of $10,000. This credit limit is the maximum amount you can borrow at any one time.
In the first month, you make purchases amounting to $2,000. You now have an outstanding balance of $2,000 and $8,000 remaining in available credit.
When your payment due date comes around, you decide to pay off $1,000. After this payment, your outstanding balance reduces to $1,000, and your available credit increases back up to $9,000.
Next month, you spend another $1,500 with your credit card. Your outstanding balance is now $2,500 ($1,000 from the previous month + $1,500 new spending), and your available credit is $7,500.
This cycle of spending, repaying, and spending again can continue as long as you keep your account in good standing by making at least the minimum payment each month, and not exceeding your credit limit. This is an example of an evergreen or revolving loan.
Please note that interest is typically charged on any balance you carry from month to month, so it’s always in your best interest to pay off as much of the balance as you can afford each month.