Line of credit

Line of credit

A line of credit (LOC) is a flexible loan from a financial institution that consists of a defined amount of money that you can access as needed and repay either immediately or over time. Interest is charged on a line of credit as soon as money is borrowed. Lines of credit are often used to cover the gaps in irregular monthly income or finance a project whose cost cannot be predicted up front.

Types of Lines of Credit

There are several types of lines of credit, including:

• Personal line of credit: This is an unsecured line of credit that individuals can use for any personal expenses.
• Home equity line of credit (HELOC): This is a secured line of credit where the borrower's home equity serves as collateral.
• Business line of credit: This is used by businesses to finance short-term working capital needs.

How a Line of Credit Works

A line of credit is a preset borrowing limit that can be used at any time, paid back, and borrowed again. The amount of interest, size of payments, and other rules are set by the lender. Lines of credit can be secured or unsecured, with secured lines of credit typically having lower interest rates.

Advantages and Disadvantages

Advantages

• Flexibility: Borrowers can use the funds as needed and only pay interest on the amount borrowed.
• Revolving credit: Funds become available again once they are repaid.

Disadvantages

• Variable interest rates: Interest rates on lines of credit can fluctuate, making it difficult to predict the cost of borrowing.
• Risk of over-borrowing: The ease of access to funds can lead to excessive borrowing and debt accumulation.

Related Financial Instruments

• Credit card
• Loan
• Overdraft
• Revolving credit

See Also

• Credit score
• Debt
• Interest rate
• Secured loan
• Unsecured loan