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Credit Line

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What Is A Credit Line?

A credit line, also known as a line of credit, is a flexible loan that banks and other financial institutions grant government, businesses, or individuals, which allows them to borrow funds when they need it. 

Deeper Definition

A line of credit offers a borrower a specific amount of money that they can access in part or entirely when needed until they reach the maximum limit. It is a loan that provides borrowers access to cash on demand without needing to apply over again. It is unlike a traditional loan where a borrower has to request each time they need funds. After qualifying for the line of credit, a borrower has a set time frame known as the “draw period” to draw money from the account. A draw period can last several years. 

With a line of credit, a borrower only pays interest on the amount they draw out from the allocated sum of money. For instance, if you obtain a $250,000 credit line from a bank and you end up using only $150,000, the interest would be calculated on the amount you used, not the total amount. What makes a credit line appealing to many borrowers is the flexibility it allows. A borrower may take out money whenever they want, pay it back and repeat the process over again. Businesses often take advantage of the loan, more than individuals, to cover working capital or impromptu strategic investment opportunities. 

Broadly, there are two kinds of the credit line:

Secured credit line: For borrowers to access this kind of credit line, they must have some collateral, such as a house, land, or bonds, to back it. 

Unsecured credit line: This kind of credit line does not require any collateral. Usually, it applies to a personal line of credit.

Credit Line Example 

Jasmine runs a catering service. Sometimes, her trusted customers order her services, make a down payment, and pay the total amount when she delivers. For Jasmine to conveniently run her catering service without hiccups, she obtained a line of credit from her bank. The loan allows her to draw up to $100,000 for five years whenever needed. Interest accrues only on the amount she draws. With that, Jasmine can let her trusted customers owe her for a bit of time while still meeting their demands.

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