What is a Line of Credit?

Are you planning to take out a Line of Credit? Are you hesitant to take this step? Well, worry not, because today in this article, we will learn everything there is to know regarding Line of Credit. You will be confident at the end of the article. Let’s not waste much time and get right into it!

What is a line of credit, and how does it work?

Line of Credit or LOC is simply a credit or an account through which an individual or any organization can borrow money whenever they need it. However, there is a specific limit fixed on how much you can borrow. But once you finish paying off the full amount of money, including the interest to the bank, you are again ready to use another line of credit. Amazing, isn’t it!

So, to keep it simple, how exactly Line of Credit works is that; once you finish all the paperwork with your banker or lender, you will have a period to draw the money. For that, you will get a specific amount of time (even up to 10 years) to draw the money whenever you want.

You will also have a time period to repay the borrowed money. And during that period, you will have to pay off the borrowed money (principal) as well as the interest. Once you pay off all your debt, you can take out another line of credit.

Types of a line of credit

You have to understand that line of credit comes in different forms, of which some may be secured while some may not be secured.

Personal Line of Credit
This line of credit falls in the category of unsecured funds. You can borrow and pay off the money, but you need to have a reliable income. Most people take out a personal line of credit for paying for things like weddings, significant events, emergencies, etc.

Home Equity Line of Credit (HELOC)
This line of credit falls in the category of a secured type of LOC. Here, you will be given a time period of 10 years for drawing the money anytime you want. During this time, you will also need to pay off the borrowed money along with the interest.

Demand Line of Credit
The people rarely use this line of credit. Here, the lender has all the right to call the borrowed money due any time he/she wants.

Securities-backed Line of Credit (SBLOC)
As the name says itself, this is a well-secured line of credit. Here, the borrower must pay off the total debt through a monthly payment interest system.

Business Line of Credit
As the name says itself, this line of credit is meant typically for people who own any sort of business. Like any other LOC, the interest rate here is changeable.

What is the benefit of a Line of Credit?

Let’s face it. Line of Credit is better than regular loans from banks for many reasons. But the most important and main benefit or advantage of a line of credit is that one can borrow the actual amount of money needed.

If you come to think of it, you pay an interest almost as much as the amount borrowed through a loan from the bank. But with a line credit, you can avoid that burdensome problem and instead make a minimum payment of interest.

What are the risks of a Line of Credit?

There’s a saying, “To everything, there is a drawback.” The same thing goes for a line of credit. Of course, there are many advantages of getting one, but with those come a few compromises. The two main problems are:

  • Interest Rate
  • Getting the approval from the borrower

Well, let’s face it. There are no lenders who lend without an interest rate, and the same goes for a line of credit. And surprisingly, the line of credit charges more interest than house loans or car loans.

Talking about approval, well, who in the world would ever lend money to a random stranger! The banker or lender has to know your credit history, whether you have a reliable income and then only he will lend you the money after you have been approved.

Is it reasonable to have a line of credit and not use it?

Say you get a new line of credit, but you are hesitant to use it, or you tend to use only a tiny percentage of the total. So what happens next? Is it suitable for your credit?

Well, the answer is, if you don’t use it or use very little of it, then it will ultimately bring down your credit usage rate and, on the other hand, increase your credit score. It all comes down to how well you do the full account management. The more you borrow, the more your credit score suffers.

Do line of credits affect credit score?

Without any doubt, Yes. A Line of Credit affects credit scores. If you are a punctual customer or client who pays at the right time, then be sure that your credit score will improve. However, if you do the opposite by making late payments, then that will badly affect your credit score.

Another way line of credit affects credit score is through the amount of available credit, which improves credit score or its utilization if the remaining amount available stays high.

As mentioned above, it all comes down to how you manage your account.


There are so many advantages to getting a line of credit these days. Say you work at a private company, or you have your own business, or you’re self-employed, and you desperately need a bundle or two of cash. Let’s face it. It’s not so easy to take out a loan from a bank, especially when you’re self-employed. And that’s where the line of credit enters the game.

With a line of credit, you can easily borrow the amount you need with lower interest rates. Many people opt for a line of credit for weddings, travels, events, business and emergencies.

Line of credit loans have got so much flexibility compared to loans and etc. Of course, it has its own drawbacks as well. But if you’re looking for a quick fund, not a fixed amount and with a lower interest rate, a Line of Credit is a way to get help.

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