A line of credit (LOC) is an account that allows you to borrow money when you need it, up to a certain amount, by writing checks or using a bank card to make purchases or cash withdrawals. Lines of credit are available from many banks and credit unions and are sometimes referred to as bank lines or personal lines of credit.
You have various borrowing options, including loans and credit cards. A loan provides you with a single lump sum payment. You must then return the principal amount plus interest over time. You can also obtain a line of credit from a bank or credit union. A credit line is similar to a credit card rather than a loan. Let’s look at how a line of credit works in more detail.
How Credit Lines Work
A credit line functions similarly to a credit card. You are given a credit limit and can borrow money as needed. A line of credit can be obtained in various quantities, from $1,000 to $100,000 or more. This differs from a loan, in which you receive a lump sum and repay it over time.
You can spread out your use of a line of credit over days, months, or even years. You are only required to repay what you have actively borrowed. Assume you need some extra cash to undertake some home repairs. A loan would provide you with $10,000 upfront (if you qualify).
Almost always, you must begin repaying that right away. If you think you’ll need that much money, you can get a $10,000 line of credit. You can borrow whenever you want, for example, a new roof one month and a new kitchen the next. If necessary, you don’t even have to borrow the entire $10,000.
This allows you to borrow in smaller sums, making repayment considerably easier. Lines of credit, like credit cards, have interest rates. Your credit report will determine the rate and quantity of the credit line.
This interest rate impacts how much your loan will grow over time. The rate, however, only applies after you’ve borrowed and spent the money. Simply having a line of credit will not earn you interest if you do not use it. You can access your line of credit by writing a specific check, visiting the institution’s website, calling, or visiting a branch in person. This takes place during your “draw period.” During the “repayment term,” you will reimburse the money you borrowed plus interest.