What Is A Line Of Credit?
A line of credit is a borrowing limit that is set by a financial institution (usually a bank) and a client that informs the level of withdrawals that the client can make.
It is a preset limit and can be used at any time of the client’s choosing until the limit is reached, beyond which borrowing is impossible. However, once repayment is made, the line is reopened, and withdrawals can be made again.
Some of the credit lines are personal, business, and home equity, and each one is embedded with flexibility as its significant upside.
However, the high-interest rates that accrue, severe penalties for late payments, and the high propensity for the clients to overshoot their budgets are some of the points to consider in making a decision.
All lines of credit function such that a preset amount can be borrowed, reimbursed to the financial institution, and borrowed again.
The rules of engagement, including the interest rate, the size of payments that should be made, are determined by the lender, and while some lines of credit allow the holders to write checks, others make provisions for a debit or credit card.
Typically, lines of credit could be secured or unsecured. Those secured by collateral security are expectedly subject to lower interest rates than the unsecured ones.
One of the perks of using a line of credit is the flexibility it affords, such that borrowers do not have to use up the amount requested. Instead, they can choose to make their spending from the line of credit suit their needs at the time and can rest assured that interest will only be charged on the amount withdrawn and not the entire line of credit.
Also worthy of note is that when repayment tranches are made, they can be done based on the budget or cash flow of the borrowers who can repay the entire balance at one go, if they can afford to do so or make the minimum required payments.
Line Of Credit Examples
A borrower can get on a line of credit plan and use it to fund his purchases if they meet the conditions outlined above.« Back to Glossary Index