Line of Credit

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Definition

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

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LAYMEN TERMS

A line of credit is like money “on demand.” A credit card is a good example of a line of credit you can use to make purchases when you don't currently have the money on hand. A line of credit gives you access to a set amount of money that you can borrow or use when you need it. But you don’t pay any interest until you actually borrow or use the money. Whereas in the case of a loan from bank, you get a sum of money and start paying interest immediately, regardless of when you use the money.

HOW DOES THIS TERM APPLY TO YOU

Just like an individual may use a line of credit to pay for something big – like a car, or something small – like a mobile phone, a business may also use a line of credit to pay for a large cost, such as an expansion of new office into the building next door or smaller such as the company purchases new copying machines.

Suppose you are went to a doctor for a regular check-up and out of nowhere the doctor tells you that you need an urgent, serious procedure or a pricey medical test. In this urgent medical emergency, you can apply for a suitable lesser-used or more budget-friendly line of credit extended by many banks and once approved; you can go on with the urgent medical procedure without being worried about the high interest rates that come with a credit card.

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