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If you're like most small business owners, you're always looking for ways to save money and grow your business. A credit line loan can be a great way to do both if you use it wisely. Here is all you need to know about the credit line.

What Is a Line of Credit?

A line of credit is a flexible loan from a bank or financial institution. Similar to a credit card that offers you a limited amount of funds—funds that you can use when, if, and how you wish—a line of credit is a defined amount of money that you can access as needed and then repay immediately or over a prespecified period.

As with a loan, a line of credit will charge interest as soon as money is borrowed, and borrowers must be approved by the bank, with such approval a byproduct of the borrower’s credit rating and/or relationship with the bank. Note that the interest rate is generally variable, making it difficult to predict what the money you borrow will cost you.

How Does a Line of Credit Work?

A personal credit line loan is a form of revolving credit that operates much like a credit card: You can write checks or make card payments in any amount up to your borrowing limit, and make payments in variable amounts as long as you meet a monthly minimum requirement. You pay interest only on the funds you borrow, and as you pay down your balance, your available credit is replenished.

Interest rates on personal LOCs can be significantly lower than those on credit cards. And since you only incur interest if you use the credit line, setting one up can be a good strategy for dealing with unplanned expenses that exceed your emergency savings or other resources.

Personal lines of credit have fixed durations, which encompass two distinct phases, each typically lasting three to five years:

Secured and Unsecured Credit

Like other loans, credit lines can be secured or unsecured lines. With a secured loan, your lender requires you to use a personal asset (or assets) as collateral that the bank can seize if you default. A home equity line of credit is a common type of secured credit line. Your lender will have a claim to that portion of your home's equity if you default on your loan.

On the other hand, a credit card is an example of an unsecured credit line loan. Instead of requiring an asset as collateral, your card issuer grants you access to funds based on your financial situation and credit history. If you become delinquent on payments, the credit card company can send your account to collections, but it can't go after any of your tangible property without taking you to court.

Revolving vs Non-Revolving Lines of Credit

Most lines of credit score are revolving or open-end accounts that allow you to continually draw money up to the limit as long as you are making payments according to your account terms.

Some are non-revolving or closed-end accounts, however. In that case, once you have paid back the balance, you cannot continue drawing funds. It may work this way once you enter the repayment period, after which you can no longer draw new funds.

Types of Credit Lines

Credit lines can come in several forms, serving different purposes.

With a more traditional line of credit, you might actually have a defined draw period, during which you can repeatedly draw money up to the limit and make interest-only or interest-plus-principal payments. However, once you enter the repayment period, your balance is due according to the repayment schedule you agreed to with your lender.

A traditional line of credit may be given to an individual or to a business. Other credit lines include:

  1. Credit cards: A personal account with a set balance limit for open-ended, revolving consumer spending. Any charges that are not paid off at the end of the month begin to accrue interest payments. The credit limit applies when you borrow money.
  2. Business credit lines: A line of credit with a bank or other lender that a business can use to cover major expenses or operating costs

The best line of credit for you will depend on factors such as your personal or business credit rating, what you have available (and want to) put forth as collateral, and the reason for your loan.

When Is Credit LineUseful?

By and large, a credit line loanis not intended to be used to fund one-time purchases such as houses or cars—which is what mortgages and auto loans are for, respectively—though lines of credit can be used to acquire items for which a bank might not normally underwrite a loan.

Most commonly, individual lines of credit are intended for the same primary purpose as business credit line Loan: to smooth out the vagaries of variable monthly income and expenses or to finance projects where it may be difficult to ascertain the exact funds needed in advance.

The Problems with Lines of Credit

Like any loan product, lines of credit are potentially both useful and dangerous. If investors tap a line of credit, that money has to be paid back (and the terms for such paybacks are spelt out when the line of credit is initially granted). Accordingly, there is a credit evaluation process, and would-be borrowers with poor credit will have a much harder time being approved.


  • Immediate access to cash
  • Only borrow what you need
  • Interest-only payments during the draw period
  • Continue borrowing as needed


  • Higher interest rates
  • Interest adds up
  • Can put assets at risk
  • Financial risks
  • Unexpected changes

Key Takeaways

A line of credit (LOC) is a preset borrowing limit that a borrower can draw on at any time.

Types of credit line loans include personal, business, and home equity, among others.

A LOC has built-in flexibility, which is its main advantage.

Potential downsides include high-interest rates, severe penalties for late payments, and the potential to overspend.


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