A line of credit (LOC) is a flexible form of borrowing that allows an individual or business to access funds up to a predetermined credit limit. It operates much like a credit card, but instead of making purchases, the borrower can withdraw money as needed and only pays interest on the amount withdrawn. The line of credit can be revolving, meaning that as the borrower repays the borrowed amount, the credit becomes available for use again.

• Credit Limit: The lender establishes a maximum credit limit for the line of credit based on the borrower’s creditworthiness, income, and other financial factors. This limit represents the maximum amount that can be borrowed.
• Flexibility: Unlike a traditional loan, a line of credit offers flexibility in borrowing. Borrowers can use the funds as needed, up to the credit limit, and they can make multiple withdrawals over time.
• Interest on Borrowed Amount: Interest is only charged on the amount of money actually borrowed and used. If the borrower has not withdrawn any funds, there are typically no interest charges.
• Repayment Terms: Lines of credit typically have a minimum monthly payment requirement. Borrowers can choose to repay the entire borrowed amount or make minimum payments, but they must manage their finances responsibly to avoid excessive interest charges.
• Revolving Credit: Once a borrower repays the borrowed amount, the credit becomes available again. This makes it a useful financial tool for managing ongoing or unpredictable expenses.
• Collateral (Secured vs. Unsecured): Lines of credit can be secured or unsecured. A secured line of credit requires collateral, such as property or assets, to back the credit. Unsecured lines of credit don’t require collateral but might have higher interest rates.
• Interest Rates: The interest rates on lines of credit can be variable or fixed, depending on the terms agreed upon with the lender. Variable interest rates can change over time, while fixed rates remain constant.