Line of Credit
What Is a Line of Credit?
A line of credit is a flexible borrowing arrangement that allows you to access funds up to a set limit as needed.
You borrow only what you use and pay interest only on the amount withdrawn.
Lines of credit can be secured or unsecured.
How a Line of Credit Works
- Approved Limit: $20,000
- You withdraw: $5,000
- Interest applies only to $5,000
As you repay, available credit replenishes.
There is typically a draw period followed by a repayment period.
Types of Lines of Credit
- Personal line of credit
- Business line of credit
- Home equity line of credit (HELOC)
Financial institutions such as Wells Fargo offer various line-of-credit products.
Why a Line of Credit Matters
A line of credit provides:
- Emergency access to funds
- Short-term liquidity
- Flexible repayment options
It can be useful for irregular expenses or cash flow gaps.
Line of Credit vs. Credit Card
Line of Credit → Often lower rates, structured draw periods
Credit Card → Higher rates, ongoing revolving access
Both are forms of open-end credit.
FAQs About Lines of Credit
Is a line of credit the same as a loan?
No, loans provide a lump sum, while lines of credit allow ongoing access.
Do unused funds accrue interest?
Interest applies only to the borrowed portion.
Does it affect credit utilization?
Yes, balances contribute to revolving credit utilization.
Related Terms
