Skip to Main Content

Credit line

Credit line is a money term you need to understand. Here’s what it means.

What is a credit line?

A credit line is a flexible loan option offered by financial institutions to individuals and corporate entities. A credit line always has a credit limit, which is the highest amount of credit the bank has extended to a particular client. The credit limit is based on the borrower’s income, credit history and other factors.

Deeper definition

When a borrower is given a line of credit, he or she spends the money using special checks or a debit-like card issued by the lender. The lender consents to pay any such checks or transactions up to the credit limit amount. This kind of credit is commonly used by companies, as they can use some of their assets to secure the loan. Because a line of credit is a secured loan, the interest rates are lower than they are for unsecured loans such as credit cards.

Closed-end loans and lines of credit must be paid in full at the end of the loan term, along with the interest accrued and any fees such as maintenance. Closed-end credit loans are common for homes and vehicles.

A credit line is flexible, as it allows you to access the money when you need it, rather than taking a lump-sum loan. A credit line can be the perfect tool for small startups seeking to build good credit histories so that they can acquire loans in the future. To achieve this, though, repayments must be submitted in time.

The cost of a credit line is one of its disadvantages. In most cases, there are costs upfront and interest accrues on the sum borrowed.

In most cases, credit lines are sought to help ease cash flow problems that may be a result of offering goods or services to clients on credit. A line of credit helps provide a business or individual with the working capital they need while waiting to collect from clients.

A home equity line of credit can be used to pay for home improvements, or to pay off higher interest credit card debt.

 Example of a credit line

A credit line can be used by individuals and companies to realize their business objectives. For investors, a credit line is quite beneficial, as you do not have to give up control of the business. In addition, you do not have to use your savings to set up and run the business.

More From Bankrate