Do you know what is a credit line or line of credit? If not, then you have come to the right place. You can simply understand that Line of Credit is an arrangement in between a bank or other financial institution and customer that decides the maximum loan that the customer can borrow.
The credit line is one of the most important terms that is being used in the world of accounting these days. Hence, it is important to make sure that people get to know all about it.
What is a Line of Credit?
The line of credit or credit line is a credit amount that any particular bank will allow the user to borrow and that too up to the maximum limit that they have in the credit line.
One of the most important things to remember in here is that the user can borrow the credit from the bank at any particular point of time. When we are talking about the line of credit, then we can say that it is just like having a sort of credit card.
The balance always keeps on revolving. After the user can pay off the balance or a certain part of the borrowed money to the bank, then he will get the credit line back again for use.
Some of the key advantages of credit lines are-
Advantages of Line of Credit
#1. Highly Convenient
Once your line of credit is approved, you can borrow money whenever you face the need of doing that
#2. Borrow as per your requirement
By using the credit line, you can borrow money as per your limit. Yes, there will be a maximum limit for your account, and you can borrow the little amounts without crossing the maximum limit.
#3. Availability of specific Draw and Repayment Periods
With your line of credit, you will get the Draw period that will offer you a period in which you can borrow money from your credit line.
It may last for more than two decades, but it changes as per your credit score. You will also have a specific Repayment Periods that will start just after your Draw Period and in that, you will be required to pay back your borrowed amount.
Let us dive deep into the world of what is credit line and understand some of its key features-
Types of Line of Credit
These lines of credit that we want to talk about in here are the ones which can be used for the business and the personal experiences too. They can be divided into four different categories-
- Unsecured Credit Line
- Secured Credit Line
- Revolving Credit Line
- Non-Revolving Credit Line
Let us discuss these and understand their key differences-
#1. Unsecured and Secured Line of Credit
Most of the line of credit loans come under the unsecured category in which borrower would never promise any sort of collateral to the lender against the line of credit. While on the other hand, in secured LOC, the borrower would promise the lender some sorts of collateral to back the credit line loan.
Opting for Secured Credit Line would be more lucrative for businesses, as it offers better credit limit and lowers interest rates. You can get these loans at lower credit score as well. While unsecured loans charge higher interest rates and they need higher credit score as well.
#2. Revolving and Non-Revolving Line of Credit
In the revolving credit line, borrowers can borrow the money as per credit limit, spend it, repay it and then can spend it again in a revolving cycle. These accounts are called open-end credit account, and they are different instalment loans such as car loans, mortgages, and so on.
In non-revolving Credit Line, the same cycle is followed excepting the availability of credit once you pay off the loan. So, the credit won’t get replenished after the payment of loans, and your account will be closed.
Now, as you know the types of Credit Line, let us now understand the working of LOC-
How does Line of Credit work?
Now that you know a little bit about the credit lines, there is no doubt that you are ready to move to some other details as well. Here we are going to discuss how the amazing lines of credit work to make you understand our point.
Well, the first thing that you need to know in here is that there are not all banks which are offering such lines of credit to the people out there.
The bank will need to use to have a particular checking account which is active in the bank, and that too, in particularly good standing as well.
Apart from that, the borrower has to make sure that they can provide some documents for the assets and the income details as well. This will help them in qualifying for the line of credit. Not just that, but there is a chance that they will qualify for the larger line of credits as well.
Traditionally, you will be able to easily access the entire money which is provided to you in the credit line and that too without any trouble. All you have to do is write a check or just pay a visit to the local branch that you have of your bank.
Also, you can access the money by wire transfer method to. One of the best methods that the banks are using these days is to provide you with some credit cards as well as some debit cards which would help you in making certain purchases against the limit of credit that you have.
There is simply no doubt that the user has to pay a particular charge, which is known as the interest and that amount is paid for the money which is borrowed against the line of credit.
However, you just have to pay the money for the part in your line of credit that you have used. So, the part that you have not used in the line of credit will be free, and you don’t have to pay anything for it.
There is often a proper time limit provided to the credit lines, and with the help of this, you will be able to draw the amount of money that you want from the bank. Well, the time limit for most of the banks is about ten years.
Well, in the particular time limit, if the bank is not able to renew the line of credit in your account, then you have to make sure that you are properly repaying all the balance all at once or in the form of instalments.
So, it is important to make sure that the bank can renew the entire line of credit in the best way to avoid any further problems for sure. This is something that the borrowers always have to keep in mind to make sure that there is no hassle in borrowing money against the line of credit.
Some Examples of Proper Lines of Credit
Now that you are all familiar with the entire concept of credit lines and how they work in the best way to create some amazing opportunities for the people to borrow money from banks, we need to get into some other details as well.
Here we are going to talk about the different types and examples of the credit lines so that the users can have an idea of what we are talking about. Well, some characteristics make the credit lines unique in every single category.
People need to know about these examples and their characteristics as well. So, without wasting any more of your precious time, let us get started with the part.
#1. Personal Line of Credit
These credit lines are one of the first examples that we have for you, and these are the ones that would provide access to some of the unsecured funds which can be borrowed, then repaid, and then borrowed again.
To open the personal credit line, there should be a particular credit history that has no particular defaults. It is also important for the borrower to have a reliable source of income and a credit score of about 680 or more.
There should also be some savings in the account of the person borrowing the money. These are some of the most important things that you need to keep in mind when it comes to personal credit lines.
#2. Home Equity Line of Credit
Another one of the most common types of the credit lines that we have for you to understand is the Home Equity Line of Credit or more popularly known as the HELOC.
Well, this is a type of credit line that is secured by all the value in the market of your home and the difference of it with the amount that is owed to the bank.
This is something that becomes the determining factors when it comes to the measurements of the credit line. The credit limit in this is about 80% of the value in the market. There is a draw period of 10 years that is provided by the Home Equity Line of Credit.
#3. Demand Credit Line
There is another type of the line of credit that you need to know about. Now, the demand credit line is something that can be secured as well as non-secured too.
When it comes to a particular demand LOC, there is no doubt that the lender will be able to call the particular amount that he borrowed and that too at any particular point of time.
The Payback until the calling of the loan will be the interest or eventually the principal plus the interest. This all depends on the particular terms which are used in this Line of Credit.
Hence, that is something people always need to remember so that they can have the best results when it comes to the credit lines for sure.
#4. Securities-Backed Line of Credit
Now, this is a very special type of credit line which is used by the people these days. In this particular type of credit line, the collateral will be calculated and then provided according to the securities that the borrower possesses.
Well, in the typical sense, the SBLOC will let the investor borrow the amount from any particular location at about 50% to 95% of the entire value that the assets have in the account. These loans are non-purpose ones, and hence the borrower will not be able to use it for buying some trade securities for sure.
#5. Business Line of Credit
This is the last but not the least example that we have in here for you. The businesses can use these lines of credit to take the amount as required depending on the situation. This means they don’t have to get a fixed type of loan for the best results for sure.
So, that is all you need to know about the lines of credit.
When it comes to taking money from the bank or any other investor, the person needs to check the lines of credit to make sure that there is no trouble later.
We hope this article guides you in the right direction for sure.