A credit line is a defined amount of money that a financial institution, such as a bank or credit union, has agreed to lend you.
You can withdraw up to the maximum amount from your line of credit whenever you need it. However, you will be charged interest on the amount borrowed.
A line of credit allows you to access money “on-demand,” which might help you with bills such as a home improvement project or unexpected car maintenance.
A line of credit is often issued by lenders such as banks or credit unions, and if you qualify, you can draw on it for a certain period of time up to a maximum amount.
Only when you borrow from the line of credit will you be charged interest. When you repay borrowed funds, that amount becomes eligible for lending again. The key here is flexibility: you may pick when to withdraw the money, pay it back, and repeat – as long as you follow the terms, including repaying what you borrow on time and in full.
Continue reading to learn how credit lines function and when they might be a smart alternative for you.
How do lines of credit work?
First, let’s go over your options when it comes to borrowing money. In general, you can apply for either a loan or a line of credit. A loan provides you with a significant sum of money and requires you to pay interest on it immediately, regardless of when you utilize it.
On the other hand, a line of credit gives you access to a specific amount of money that you can borrow when you need it. However, you do not pay interest until you borrow.
There are company lines of credit, but we’ll focus on personal lines of credit here.