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Line of Credit (LOC) – Meaning, Types and Examples
People, businesses, institutions, and even governments have their own financial needs. They face various situations in which they have to manage available finances and avail of external help in the form of loans. There are several options or schemes made available by lending institutions. Line of credit is an option that helps people manage their financial crunch.
This article aims to understand the meaning of line of credit and concepts such as line of credit loans and online line of credit. Let’s begin with the fundamental concept and then move on to its various aspects.
A line of credit (LOC) is a predefined borrowing limit that customers can tap into anytime. The borrowers can take out the amount as needed until they reach the limit. Once they repay that money, it can again be borrowed in the case of an open LOC.
A financial institution makes an arrangement such as LOC for its customer and specifies the maximum loan amount for the customer to borrow. The borrower can access money from the LOC at any point, provided that they don’t exceed the predefined credit limit set in the agreement.
After understanding the line of credit meaning, let’s move on to its types.
Customers can borrow unsecured funds, repay, and borrow them again.
The limit for borrowing is set based on the home's market value (security).
Businesses prefer borrowing on an as-needed basis rather than taking out a fixed loan.
In this rarely used LOC, the lender has the right to call the borrowed amount due at any time.
Borrower’s securities are provided as collateral in this special secured demand LOC.
A borrower can repeatedly withdraw throughout the draw period and make payments throughout the span of the loan.
Money is lent for a fixed time, and this type is also known as an instalment loan.
The borrower provides security to obtain a loan.
The borrower need not provide any collateral.
LOC has the following advantages –
These advantages are worth considering while availing of a line of credit loan.
Lenders conduct a credit analysis when a borrower applies for a LOC. This leads to a hard inquiry on borrowers’ credit reports, which lowers their credit scores in the short term.
If you make late payments, it affects payment history, which is an important factor in calculating credit score.
Credit utilization also matters a lot when it comes to calculating credit scores. Nearly one-third of your credit score depends on credit utilization.
Length of credit history is another factor affecting your credit score. Although its share is less than credit utilization, it can affect your score.
We have understood the concept, types, and advantages of LOC; now, we will have a look at the repayment process of LOC.
LOC is a revolving loan that allows a borrower to access the funds as and when required up to a specific limit. After repaying the borrowed amount borrower can again borrow the funds within the limits.
Repayment of LOC is not so complex. You can repay the amount you borrowed from your line of credit either immediately or over time in instalments (regular minimum payments). You will be charged with interest on your LOC as soon as you borrow the money.
Applying for LOC is the most important yet simple part of the process. You just need to follow the below-mentioned steps to apply for LOC. The steps for applying for the LOC are as follows –
You can also consider an online line of credit.
Line of Credit (LOC) is a type of financial support offered by lending institutions to needy persons, businesses, institutions, or governments. Catering to financial needs on time is possible with the help of LOC. You can borrow the amount required and repay the same with interest applied to it. The benefits of LOC are not restricted to managing your financial needs, but there are several others as well. The lenders today have kept a simple process to apply for LOC. You can follow the given process and enjoy the benefits of LOC.
Frequently asked questions
1. What is a line of credit, and how it works?
LOC is a predefined borrowing limit similar to credit cards. There’s a maximum amount set, and interest is charged on the used sum.
2. What is a line of credit example?
You can qualify for a LOC for ?50,000; however, you can choose how much you want to borrow (out of your credit limit). Once you repay the amount borrowed, you can access the available credit up to the pre-approved limit.
3. What's the benefit of a line of credit?
The key benefit of LOC is the ability to borrow only the required amount and avoid paying interest on a large amount.
4. What is the line of credit limit?
Your bank decides the maximum sum you can borrow from a LOC, and it’s also mentioned in your LOC agreement.
5. What documents are required for a Line of Credit?
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