Line of Credit: What you need to know about it

Posted on 2015-02-10

There are terminologies we encounter in our day to day living that may not be very significant to us, but create impact on the way we understand them. Take for example the term “line of credit”. This terminology is usually encountered when we speak of loans, debts, money lending, etc. It may already sound familiar to you, but what do you really know about it?

A line of credit is actually an arrangement between you as a borrower and the financial institution as a loan provider that defines maximum loan balance that the latter is willing for you to maintain. The borrower should not exceed the agreed maximum balance but he has the freedom to draw down on his line of credit anytime he wishes to. Sounds easy, right?

One advantage that a borrower can enjoy from it is that, unlike any regular loan, the attached interest rate term isn’t in general charged against the unconsumed line of credit. It also provides more flexibility over a regular loan in a sense that the borrower can draw on the line of credit any moment he feels he needs to.

The mechanism on how it works is simple in approach. First, when you decide to borrow against line of credit, what you are going to pay is only the interest on the amount that you actually borrowed. It means, regardless of the available balance or the entire amount that you’re able to borrow, what you need to consider is only the actual amount you borrowed against your line of credit. For example, if the agreed amount between you and the financial provider amounts to $20,000, you’re privileged to borrow as much or as little as you wish up to this certain amount limit. Say you incurred $5,000, what you are going to pay is only the interest on that amount and you still have an available $15, 000 to borrow.

Depending on the agreement, line of credit may come into two distinct types: secured and unsecured. Secured line of credit is actually backed up with an asset or property that serves as security for the amount borrowed that can readily be repossessed by the lender in the event that the borrower defaults to his payments. On the contrary, unsecured line of credit, like in the case of credit card, is not by any means guaranteed by any physical properties to serve as collaterals for the amount of money borrowed.

The following are some examples of Line of Credit:

Overdraft Line of Credit

It is a type of line of credit that is in general available in borrower’s checking account. This can aid the borrower to establish small loans when he spends more than what is available in his account.

Demand Line of Credit

It’s another type of line of credit which, as the term suggests, applicable only upon the demand. It is often utilized to fund margin accounts and is common in personal loans without any fixed period of maturity. Demand line of credit enables the borrower to borrow a certain amount of money in a daily basis or in on-demand basis.

Export packing line of credit

It applies in the provided borrowing facility that aids the exporters in financing their costs of marketing their merchandises through packing and transporting these goods prior to their shipments.

Credit Card line of credit

Credit card is in itself an overall manifestation of what a line of credit is all about. It’s a revolving loan that allows the borrower to access money up to the agreed maximum limit. A borrower can partake certain amount to his line of credit and once he had paid for it, he can use it again anytime for as long as he avoids to max out the agreed limit to it.

Knowing these valuable insights can actually affect us in our better understanding of what line of credit is really about. We need to factor in several key elements that refer to it so that in the near future, it will never be difficult for us to know what is meant by it.