An evergreen loan is a type of loan you can use to repeatedly access funds without having to apply for credit over and over again. The repayment of principal is not required, and you’re allowed to access a pool of funds up to a set amount. When you borrow some of this money, you’ll need to repay the balance, likely on a monthly basis.
Here’s what an evergreen loan is, how this type of borrowing works, and the pros and cons of using evergreen loans.
Definition and Examples of Evergreen Loans
An evergreen loan is a type of loan that gives you access to a line of credit. You can borrow funds up to the maximum credit limit. As you make payments, the money becomes accessible again. This can continue indefinitely, which is where the term "evergreen" comes from.
Evergreen loans may also be called “revolving lines of credit.” These are open-ended funding sources, and you can continue to access money from them as long as you make the required payments and follow the creditor's terms and conditions.
How Do Evergreen Loans Work?
When you apply for an evergreen loan, the lender will assess your financial credentials before approval. If you qualify, you will be extended a line of credit indefinitely. You can draw from it, make payments, then draw from it again.
A credit card is an example of an evergreen loan. When you apply, the credit card company will review your income, credit score, and other financial information to determine your credit limit and your annual percentage rate (APR). The credit card company may decide to extend you a line of credit up to a specific amount, such as $5,000. As long as you comply with the agreement, you can charge up to $5,000 to your credit card at any given time. However, you cannot exceed that amount.
As you borrow and repay the money, the line of credit up to the maximum amount becomes accessible again. For example, let’s say you buy new furniture for your home with your credit card and use the full $5,000 credit limit. You pay off $1,000 of the balance, which leaves you with $1,000 of available credit again. You then charge another $1,000 to that card for home repairs. At the end of the month, you pay off the full $5,000 balance on your credit card. After that, you charge $500 for groceries, then another $1,000 for car maintenance. You then pay off that $1,500 balance and have the full $5,000 credit limit available again.
You can continue to use the line of credit as much as you want, up to the maximum total of $5,000. And you can choose how quickly to repay the borrowed amount as long as you meet minimum payment requirements. As long as you comply with the terms of the cardholder agreement, and there's no cleanup requirement, then this line of credit remains available to draw from.
Pros and Cons of Evergreen Loans
Build credit history
Interest rate may be high
May be difficult to qualify
- Flexibility: Borrowers can access money at any time, as needed, up to the limit. As they repay what they've borrowed, they can obtain more funding without having to reapply for a loan again.
- Build credit history: Evergreen loans may help you build up your credit history, which can help you improve your credit score. The more you utilize your line of credit and repay the balance on time and in full, the more likely you are to see your credit score go up over time.
- Interest rate may be high: The interest rate on some types of revolving loans can be high—as much as 18% or more—especially if you don’t have a great credit score. Rates are often variable, too, which means they can change—and often go up—over time. Borrowers who don't pay off their credit card balance in full every month could face high interest charges.
- May be difficult to qualify: If you don’t have a good credit score or history, a lender may not approve you for an evergreen loan. The evergreen nature of the loan creates risk for the lender. The lender may worry that your financial situation could change, making the chances of default more likely.
Alternatives to Evergreen Loans
Installment loans are an alternative to an evergreen loan. Installment loans are closed-ended loans such as personal loans. You receive a set amount of money in one lump sum and repay it on an agreed-upon schedule over a designated period of time. More money does not become available as you pay down the loan.
A home equity loan is another example of an installment loan. With a home equity loan, you receive a lump sum of money—usually no higher than 85% of the equity in your home—and pay it back over a period of years. You are not able to access additional funding as the loan balance is paid down.
- Evergreen loans allow borrowers to access money repeatedly from a line of credit or pool of funds as long as they repay what they've borrowed or spent.
- Evergreen loans are also usually revolving lines of credit, like a credit card, that come with an interest rate.
- You can draw money from an evergreen loan indefinitely without having to reapply for the line of credit as long as you make payments and follow the creditor’s terms of service.