Line Of Credit

July 30, 2009

A line of credit (LOC) is a term used to describe a financial arrangement between a customer and any financial institution, such as a bank, which serves to establish the maximum loan balance amount that the bank allows the customer to borrow. The customer is allowed to draw down on this line of credit whenever he wishes, so long as he is careful not to exceed the maximum amount agreed to in the arrangement. It is also sometimes referred to as a credit line, or tradeline. A simple example of an LOC is when a credit card company allows a card holder to only borrow a set amount of money from a certain credit card.


An LOC, therefore, is a credit source that is given to an individual or company by a financial institution, most commonly a bank. They often extend lines of credit to customers they deem as credit worthy, to help them overcome their liquidity problems.

There are several types of lines of credit, such as overdraft, cash credit, export packing credit, demand loan, discounting, purchase of commercial bills, demand loan, and many others available in banks today. They can be seen as safety accounts are is available at all times to be tapped into whenever the need may arise, or even to be used only in emergencies, and not otherwise. The interest that is required to be paid is applied only to the amount of money that is taken out of the LOC.


This limit on an LOC is decided on by considering many variable factors, such as an individual’s credit history, their job stability and income, their monthly expenses, their ability to make their interest payments on time, the ability to pay back the principal, an organisation’s capital profits, as well as the credit standards of the lending institution. The LOC is also usually influenced by the borrower’s recoverable tangible assets, which will be used in the event that the customer is unable to repay the LOC.

A common type of LOC is a home equity LOC, sometimes referred to as a HELOC. This is a loan where the lending institution agrees to allow the customer to borrow a certain maximum amount for an agreed upon period of time, known as a term, and where the customer’s equity of his house is used as collateral.


A HELOC is different from a conventional line of credit loan because the customer is not given all the money that he asks to borrow right away. Instead, the amount he requires is split up into several instalments, and the customer then uses this loan to borrow certain sums of money, ensuring all the while that their total does not amount to the credit limit. HELOC funds need to be borrowed during what is called a ‘draw period’, which is usually between five to twenty five years. When the customer repays this line of credit, he has to repay the amount borrowed, in addition to the interest that was applied to it for the duration of the loan.

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Written by Uncle Sam · Filed Under Mortgage and Loan 

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