An Easy To Understand Line Of Credit Definition

To easily understand a business term such as line of credit, a clear definition is essential. Line of credit is a pool of credit sources provided by a lender, basically a bank, to its borrower. It comes in various forms and is typically offered to clients with good credit performance. Funds are made available at any time the borrower needs the money. In addition, no interest rates are charged to funds that are not used.

Forms of Line of Credit

Line of credit comes in several forms:

Cash Loan - Also known as cash advance or cash credit, this loan can be acquired with a guarantee to secure the loan.

Revolving Line of Credit - A specified amount is provided by the loan provider to the borrower wherein the customer can borrow another fund once the previous loan is paid.

Overdraft Protection - A checking account feature that protects the borrower from overdraft charges due to bouncing checks.

Home Equity - The borrower's equity of his home serves as the loan's collateral. A checkbook, credit card, or other means of drawing money is provided by the bank to the customer and a definite period of time to draw the funds from the customer's line of credit is established.

Term Loan - A loan with fixed maturity and usually involves the amortization of principal. 

Criteria/Requirements

Financial institutions imposed a set of requirements for an individual to avail their line of credit services. A borrower's creditworthiness is strictly considered. The applicant's ability to repay the loans as well as his credit history and credit score are evaluated before the approval is given.


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