A line of credit is the current borrowing limit that can be used over a disbursing time. Each lender is entitled to giving its own line of credit over a loan agreement. This means that the borrower can take money out as needed until the limit is reached and as money is repaid.
A LOC is usually an arrangement between the bank (financial institution) and a client where the maximum loan amount the client can borrow is established. So with that, the borrower can obtain funds from the line of credit at any time as long as they do not exceed the maximum amount according to the agreement. Also, there are to meet up with any other requirements such as making timely minimum payments. Nevertheless, it may be offered as a facility.
WHAT YOU SHOULD KNOW
- Do you know that a line of credit is constructively flexible?
- Do you know that a line of credit is an open-end credit account? This is because borrowers can borrow to spend and repay it and spend it again unto a never-ending cycle.
- Credit lines also have downsides when it turns out to be a high-interest rate loan, engulfed with penalty payments, and easy to overspend.
It is important to know that all LOCs will set a limit that borrowers can borrow, when to be paid back, and borrowed again. This drastically means that the amount and interest, size of payments, and some other rules are personal to each lender. Thus, it will ever vary as long as the lenders are not the same. Under some circumstances, a line of credit may allow you to write checks; generally, it can be of credit or debit card. However, LOC can be secured or unsecured LOC (eventually subject to high-interest rates).
Each Line of Credit has built-in flexibility or rather the main advantage. In as much as borrowers can request a certain amount, they don’t have to use it all. Instead, they can cut spending with LOC to using for needs and owe interest only on the amount they draw, instead of driving interest on the entire credit line. It is advisable for borrowers to choose their repayment amounts according to how convenient it will report to their cash inflow and budget. E.g. take out minimum monthly payments or choose to pay off the entire outstanding balance.
Unsecured Vs. Secured LOCs
When the line of credit is unsecured, it means the borrower does not back up an agreement with collateral. But the home equity line of credit is always a secured line of credit because it secured with the equity borrower’s home. Secured lines of credit have great advantages because it is a way lenders can recoup the advanced funds on cases of non-payment.
a secured line of credit is more attributed and acknowledged by business owners and individuals because it leverages the advantage of getting more credit limit with lower interest rates compared to unsecured lines of credit.
Unsecured lines of credit are always with higher interest rates in most cases unlike secured lines of credit. This makes it difficult to obtain because it will require a good credit score. Instead of facing the risk of repayment, lenders have to cut down the number of funds that are borrowed upon high-interest rates. Now you’ve seen the reason why credit cards have high APR as they are the unsecured line of credit. The line of credit for credit cards states the credit limit, how much can be charged on the card without pledging any asset. Even if you miss payments, issuers cannot seize any asset for compensation.
Businesses and Individuals often offered a revocable line of credit. By banks or financial institutions. A bank or financial institution can revoke a line of credit. When the finance of their potential customer is struggling. Or if the market condition becomes adverse that it necessitates revocation. A revocable line of credit can be unsecured or secured. With the former carrying a higher rate of interest than the latter.
Revolving vs. Non-Revolving Lines of Credit
Line of credit can be a revolving account. (open-end credit amount) or non-revolving account (closed-end credit amount revolving accounts. Are simply seen in credit card while the mortgage. Car loans, and signature loans are non-revolving credit. These set loans are installment loans which mean that a. Borrower pays off the monthly set of money (installment) until the loan is averted. There is always reapplication over a non-revolving line of credit. Once the former credit has been repaid fully, in order to get new credit. And he cannot spend the funds again.
Both revolving and non-revolving credit create a credit line. With a credit limit, with a variety of purposes to loans. And interest charges. In non-revolving credit, once the credit is paid off. The account is closed and cannot be used again.
Different Lines of credit
- Personal Line of Credit
- Home Equity Line of Credit (HELOC)
- Demand Line of Credit
- Securities-Backed Line of Credit (SBLOC)
- Business Line of Credit