A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is an arrangement between a financial institution—usually a bank—and a client that establishes the maximum loan amount the customer can borrow.
A personal line of credit is a loan that is very similar to a credit card as you get a specific amount of money that you can use for any purpose, and you are charged interest only on the amount that you use. When you use a line of credit, you apply once for a maximum limit and then make payments on the amount that you use, not the total limit itself. It’s a flexible borrowing option particularly useful for unexpected expenses or for paying for home improvements, education and debt refinancing.
Borrowers can apply for lines of credit at a bank, credit union or other financial institution. After application and approval, the funds become available fairly quickly — usually by the next business day. In the case of business lines of credit, the lender evaluates profitability and other business indicators that show the viability of your business and its ability to pay back the borrowed amount.
A business line of credit can be a useful tool to get your business off the ground. This type of loan is usually used to fund working capital or short-term financing needs, like purchasing inventory, paying tax bills, paying vendors or payroll.
A personal line of credit refers to the money you borrow to cover personal expenses such as home repair, bigger purchases, significant events or just to smooth out dips in personal income.
If your home is worth more than your mortgage, you may be able to borrow against that difference called equity. This type of loan that uses your house as security is called a home equity line of credit.