Line of Credit: An LOC is an arrangement between a financial institution—usually a bank—and a customer that establishes the maximum loan amount that the customer can borrow.
What is Line of Credit (LOC)?
Line of Credit: Line of Credit (LOC) is a predetermined borrowing limit that can be tapped at any time. The borrower can withdraw as per his requirement till the maximum limit is reached and when the money is repaid, it can be borrowed again in case of an Open LOC. An LOC is an arrangement between a financial institution—usually a bank—and a customer that establishes the maximum loan amount that the customer can borrow. The borrower can avail the facility of funds from the LoC at any time as long as they do not exceed the maximum amount (or credit limit) stipulated in the agreement.
– LOC is a pre-determined borrowing limit which can be availed by the borrower at any time.
– Types of credit lines include personal, business, home equity, etc.
– LoC has inherent flexibility which is its main advantage.
– Potential disadvantages include higher interest rates, harsher monetary penalties for late payments, and — the possibility of higher expenses.
Understanding Credit Lines
All LOCs are created out of a predetermined amount of money that can be borrowed, paid off and re-borrowed as and when required. The amount of interest, the size of the payment and other terms are determined by the lender. Some lines of credit allow you to write a check (draft) while others involve a type of credit or debit card. LOCs can be secured (by collateral) or unsecured wherein unsecured LOCs are generally subject to higher interest rates. LoC has inherent flexibility which is its main advantage. The borrower can request a specific amount but they do not have to utilize the entire amount. Instead, they can determine their expenditure from the LoC as per their requirement and they will have to pay interest only on the amount drawn and not on the entire credit line.
home equity loan