A line of credit (LOC) refers to a flexible loan from a bank or any other financial institution to a person or entity. In a sense, it is similar to a credit card. A borrower is given access to a limited amount of funds that they can use whenever or however they wish. The outstanding balance then has to be repaid immediately or over a specific period.
When used as a loan, an LOC will start to charge interest only once money is borrowed. In addition, only the amount actually drawn is charged and not the credit limit.
How to Get One
To get a line of credit, you need to be approved by the bank. You have greater chances of getting approved if you have a good relationship with the financial institution or if you have an excellent credit score.
Types of Lines of Credit
- Home Equity Line of Credit (HELOC) – This is the most common for consumers. With this, the value of the home you own will serve as collateral. It’s a popular option because it allows you to borrow larger amounts at lower interest.
- Personal Line of Credit – This often comes with varying credit limits, depending on the bank. Borrowers with a solid credit history may be approved for a limit of up to $50,000. Unlike the HELOC, it does not require collateral.
- Business Line of Credit – This is rather similar to the personal line of credit. It provides businesses access to money that can be used for business expenses. It does not have a lump-sum disbursement upon the opening of the account though.