- September 2, 2020
- Posted by: admin
- Category: investment
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit.
A LOC is an arrangement between a financial institution—usually a bank or fund and a client that establishes the maximum loan amount the customer can borrow. The borrower can access funds from the line of credit at any time as long as they do not exceed the maximum amount (or credit line) set in the agreement and meet any other requirements such as making timely minimum payments. It may be offered as a facility.
All LOCs consist of a set amount of money that can be borrowed as needed, paid-back and borrowed again. The amount of interest, size of payments, and other rules are set by the lender. Some lines of credit allow you to write checks (drafts) while others include a type of credit or debit card. As noted above, a LOC can be secured by collateral or with unsecured LOCs typically subject to higher interest rates.
A line of credit has built-in flexibility, which is its main advantage. Borrowers can request a certain amount, but they do not have to use it all. Rather, they can tailor their spending on the LOC to their needs and owe interest only on the amount they draw, not on the entire credit line. In addition, borrowers can adjust their repayment amounts as needed, based on their budget or cash flow. They can repay, for example, the entire outstanding balance all at once or just make the minimum monthly payments.