A line of credit is a financial arrangement granted by a bank or financial institution that allows an individual or business to access funds up to a certain limit. It is a flexible form of borrowing which differs from a traditional loan as it provides a revolving credit facility, meaning that once the funds are repaid, they become available for borrowing again without the need for a new application.
The line of credit establishes a maximum amount that can be borrowed, commonly known as the credit limit. The borrower has the freedom to access any amount within this credit limit as and when needed, making it a convenient solution for managing fluctuating expenses or occasional financial needs. Interest is typically charged on the outstanding balance, and payments are required periodically, either on a monthly or quarterly basis.
Line of credit terms will vary depending on the lender and the type of credit. Personal lines of credit are often unsecured, while business lines of credit may require collateral, such as accounts receivable or inventory. The interest rates can be fixed or variable, and some lines of credit may come with additional fees or charges, such as an annual fee or cash advance fees.
Line of credit agreements can be valid for a specific period, known as the draw period, during which the borrower can withdraw funds. Once the draw period ends, the repayment period commences, where the borrower starts repaying the principal and interest on the outstanding balance. Unlike loans, borrowers can typically access the line of credit for an extended period, making it a flexible and convenient source of funding.
