A line of credit is a borrowing option of arrangement offered by banks, financial institutions and other licensed consumer lenders to a government, business or an individual, where the borrower establishes the maximum loan. The borrower requests a certain amount to these lenders and once approved, borrower can access the preset amount of money that the bank or credit union has agreed to lend. Furthermore, borrower has to pay interest on the amount borrowed or used, but not on the entire amount approved for borrowing. For example – if someone has a $30,000 line of credit from his bank, but draws only $6000, he will be charged interest on only the $6000.
Borrower can access this fund at any time as long as it doesn’t exceed the maximum amount (or credit limit) set in the arrangement or agreement and meet other requirements such as making timely minimum payments. Hence, a line of credit is a borrowing option wherein the customer applies only once for a credit limit and continues to use and re-use the credit allotted based on the customer’s credit needs. The time period for drawing the money can last for several years. Once qualified for the line of credit, the bank usually may give the borrower particular checks or a card to use, or transfer the money to the individual’s checking account. A few lines of credit may incur fees, such as an annual fee. Explore Definition