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What is a Line of Credit?
A line of credit is one of the ways you can borrow money from the bank. It's like a credit card, in that you can borrow against the
credit limit, but like a loan because the entire balance of the credit line is due within a certain period of time.
Features of a Line of Credit
A line of credit has a credit limit. This is the maximum amount of money you can take out against the credit line.
There are two "periods" of a line of credit. During the draw period you can borrow money against the credit line. During the draw period, you're only required to make interest payments or the minimum payment set by your lender. Then, there's the payback period during which you can no longer borrow against the credit line. Instead, during the payback period, you're required to make interest and principle payments on what you've borrowed.
The terms of the credit line contract state what must happen when the draw period ends. You might be able to extend the draw period, you might have to pay the balance immediately, or you may be able to repay the balance over a period of time.
Like both loans and credit cards, a line of credit has an interest rate. Line of credit interest rates are typically variable interest rates that can fluctuating from one month to a next. They tend to be lower than the interest rates on fixed-rate loans.
You can access your line of credit by writing a check for the amount you want to borrow.
Home Equity Lines of Credit
A Home Equity Line of Credit, or HELOC, is a line of credit that uses the equity in your home as collateral. You can borrow up to, and sometimes above, 100% of the appraised value of your home less what you owe on your mortgage. So, if your home is appraised at $100,000 and you owe $70,000 on a mortgage, you can borrow up to $30,000.
HELOCs have variable interest rates that are usually lower than the interest rates on loans and credit cards. However, the closer your credit limit is to your complete home equity, the higher your interest rate will be.
Because an HELOC is tied to your home's equity, you risk foreclosure if you default on the payments.
Other Lines of Credit
An Overdraft Line of Credit is an overdraft protection program that saves you from expensive overdraft fees whenever you overspend your checking account. Instead of reversing the transaction or charging you a fee whenever your account balance is too low to cover a transaction, your bank will draw from your overdraft line of credit, up to a certain limit.
A Personal Line of Credit is an unsecured credit line offered to a consumer. Banks look for solid credit history from a personal line of credit applicant.
Business Line of Credit is extended to businesses that need to borrow money on a periodic basis. A business credit line may be secured or unsecured and typically have higher credit limits than personal credit lines.
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