What is a ‘Line Of Credit – LOC’
A line of credit (LOC) is an arrangement between a financial institution, usually a bank, and a customer, that established the maximum amount of a loan that the customer can borrow. The borrower can access funds from the line of credit at any time, as long as he or she does not exceed the maximum amount set in the agreement and meets any other requirements, such as making timely minimum payments.
BREAKING DOWN ‘Line Of Credit – LOC’
A line of credit has built-in flexibility, which is its main advantage. Borrowers can request a certain amount, but they do not have to use it all. Rather, they can tailor their spending on the LOC to their needs and have to pay interest only on the amount they draw, not on the entire credit line. In addition, consumers can adjust their repayment amounts as needed, based on their budget or cash flow. For example, they can repay the entire outstanding balance at once or just make the minimum monthly payments.
Why a Line of Credit (LOC) is a Revolving Account
A line of credit is a type of revolving account. This arrangement allows borrowers to spend the money, repay it and spend it again in a virtually never-ending, revolving cycle. Revolving accounts such as lines of credit and credit cards are different from installment loans such as mortgages, car loans and signature loans. With installment loans, consumers borrow a set amount of money and repay it in equal monthly installments until the loan is paid off. Once an installment loan has been paid off, consumers cannot spend the funds again unless they apply for a new loan.
Unsecured LOCs vs. Secured LOCs
In most cases, lines of credit are unsecured loans. This means the lender doesn’t receive any collateral backing the unsecured LOCs. However, there is a notable exception: the home equity lines of credit (HELOC). This line of credit is secured by the equity in the borrower’s home, but it works exactly like any other line of credit.
Demand Line of Credit
A demand LOC is a rare type of credit line that lets lenders call the loan due at any time. As in the case of a standard LOC, lenders set a maximum amount that borrowers of a demand LOC can withdraw. The borrowers can spend any amount up to the limit. With demand loans, borrowers may make small monthly payments or may simply wait until the lender demands repayment.