Sep 30, · A credit line, also known as a line of credit (LOC), is a type of standing loan that allows individuals, businesses, or other organizations to borrow cash when they need it, repay what they have borrowed, and continue borrowing without applying for a new loan. A credit line is the amount of money that can be charged to a credit card account. The size of a credit line, and how much of it has been borrowed, have a large influence on consumer credit scores. Low credit utilization — that is, a credit line on which little has been borrowed — leads to a higher credit score. Credit line is also known as a credit limit.
Definition: A line of credit LOC is the maximum amount that a customer has access to and can borrow what does credit line mean a what does credit line mean on an ongoing basis. In other words, this is an open credit line that allows a customer to continually borrow funds from lien bank up to a maximum amount.
What is the definition of credot of credit? As a rule of thumb, the line of credit is one of the most commonly used ways to finance residential or commercial properties. The legal contract between the bank and the borrower allows the borrower to have immediate access to the funds as long as the determined ceiling in the loan balance is not exceeded.
Also, a LOC allows a greater flexibility as borrowers can adjust their repayment installments based on their existing cash flows and can get the exact amount of funds they need, but they pay interest only on the amount spent. His lender sets a loan term of 10 years for the repayment of the loan and allows Peter to write checks or use a special credit card associated with the LOC to make his loan payments.
In addition, Peter is whah to choose how he can make the payments on his home equity lline. His lender has offered him the option of monthly payments on the interest how to find out blocked numbers on iphone for free the principal or payments towards the meah and to pay back the principal at the end of the loan term.
A third option involves a comprehensive repayment plan, which will allow Peter to make payments towards the principal of the loan.
Define Line of Credit: LOC means a short-term loan from a bank typically collaterized with a credih, long-term asset. Search for:.
Definition & Examples of a Credit Line
A credit line is your total spending limit. Image Credit: Purestock/Purestock/Getty Images. A new credit card always comes with an initial credit line, which most credit card companies refer to as a credit limit. credit line (Noun) A line of printed text attached to written material, an image, illustration, or the like, which identifies the author, photographer, or other source. credit line (Noun) A line of credit. Apr 11, · A line of credit (LOC) is an arrangement between a financial institution, usually a bank, and a customer that establishes the maximum amount a customer can borrow.
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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—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 limit 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 unsecured , 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. Most lines of credit are unsecured loans.
This means the borrower does not promise the lender any collateral to back the LOC. One notable exception is a home equity line of credit HELOC , which is secured by the equity in the borrower's home. From the lender's perspective, secured lines of credit are attractive because they provide a way to recoup the advanced funds in the event of non-payment.
For individuals or business owners, secured lines of credit are attractive because they typically come with a higher maximum credit limit and significantly lower interest rates than unsecured lines of credit. A credit card is implicitly a line of credit you can use to make purchases with funds you do not currently have on hand. Unsecured lines of credit tend to come with higher interest rates than secured LOCs. They are also more difficult to obtain and often require a higher credit score or credit rating.
Lenders attempt to compensate for the increased risk by limiting the number of funds that can be borrowed and by charging higher interest rates. That is one reason why the APR on credit cards is so high. Credit cards are technically unsecured lines of credit, with the credit limit—how much you can charge on the card—representing its parameters. But you do not pledge any assets when you open the card account. If you start missing payments, there's nothing the credit card issuer can seize in compensation.
A revocable line of credit is a source of credit provided to an individual or business by a bank or financial institution that can be revoked or annulled at the lender's discretion or under specific circumstances. A bank or financial institution may revoke a line of credit if the customer's financial circumstances deteriorate markedly, or if market conditions turn so adverse as to warrant revocation, such as in the aftermath of the global credit crisis.
A revocable line of credit can be unsecured or secured, with the former generally carrying a higher rate of interest than the latter. A line of credit is often considered to be a type of revolving account, also known as an open-end credit account. This arrangement allows borrowers to spend the money, repay it, and spend it again in a virtually never-ending, revolving cycle. Revolving accounts such as lines of credit and credit cards are different from installment loans such as mortgages, car loans, and signature loans.
With installment loans, also known as closed-end credit accounts, consumers borrow a set amount of money and repay it in equal monthly installments until the loan is paid off. Once an installment loan has been paid off, consumers cannot spend the funds again unless they apply for a new loan. Non-revolving lines of credit have the same features as revolving credit or a revolving line of credit.
A credit limit is established, funds can be used for a variety of purposes, interest is charged normally, and payments may be made at any time. There is one major exception: The pool of available credit does not replenish after payments are made.
Once you pay off the line of credit in full, the account is closed and cannot be used again. As an example, personal lines of credit are sometimes offered by banks in the form of an overdraft protection plan. A banking customer can sign up to have an overdraft plan linked to his or her checking account.
If the customer goes over the amount available in checking, the overdraft keeps them from bouncing a check or having a purchase denied. Like any line of credit, an overdraft must be paid back, with interest. LOCs come in a variety of forms, with each falling under either the secured or unsecured category. Beyond that, each type of LOC has its own characteristics.
This provides access to unsecured funds that can be borrowed, repaid, and borrowed again. Opening a personal line of credit requires a credit history of no defaults, a credit score of or higher, and reliable income.
Having savings helps, as does collateral in the form of stocks or CDs, though collateral is not required for a personal LOC. Personal LOCs are used for emergencies, weddings and other events, overdraft protection, travel and entertainment, and to help smooth out bumps for those with irregular income. A HELOC is secured by the market value of the home minus the amount owed, which becomes the basis for determining the size of the line of credit.
HELOCs often come with a draw period usually 10 years during which the borrower can access available funds, repay them, and borrow again. After the draw period, the balance is due, or a loan is extended to pay off the balance over time. HELOCs typically have closing costs, including the cost of an appraisal on the property used as collateral.
This type can be either secured or unsecured but is rarely used. With a demand LOC, the lender can call the amount borrowed due at any time. Payback until the loan is called can be interest-only or interest plus principal, depending on the terms of the LOC. The borrower can spend up to the credit limit at any time. SBLOCs are non-purpose loans, meaning the borrower may not use the money to buy or trade securities. Almost any other type of expenditure is allowed.
Businesses use these to borrow on an as-needed basis instead of taking out a fixed loan. The financial institution extending the LOC evaluates the market value, profitability, and risk taken on by the business and extends a line of credit based on that evaluation. The LOC may be unsecured or secured, depending on the size of the line of credit requested and the evaluation results.
As with almost all LOCs, the interest rate is variable. The main advantage of a line of credit is the ability to borrow only the amount needed and avoid paying interest on a large loan. That said, borrowers need to be aware of potential problems when taking out a line of credit. Home Equity. Debt Management. Loan Basics. Federal Reserve. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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Popular Courses. Personal Finance Loan Basics. Key Takeaways A line of credit has built-in flexibility, which is its main advantage. Unlike a closed-end credit account, a line of credit is an open-end credit account, which allows borrowers to spend the money, repay it, and spend it again in a never-ending cycle. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.
Revolving credit is an agreement that permits an account holder to borrow money repeatedly up to a set limit while repaying in installments. Maximum Loan Amount A maximum loan amount describes the total that one is authorized to borrow.
It is used for standard loans, credit cards, and line-of-credit accounts.
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