What is Line of Credit Loan?

Line of credit loan can be used as a borrowing option that gives you access to funds whenever you choose up to a predetermined credit limit. With some such arrangements, you access loan funds from a separate checking account. With others, you transfer funds into your checking account. An advantage to a line of credit loan compared to a traditional loan is that no interest is charged on the unused portion of the credit line and in that case less interest has to be given.

Secured vs. Unsecured

The banks, credit unions and lenders offer secured and unsecured traditional loans, most offer secured and unsecured lines of credit loan. While these may appear similar on the surface, they are distinctly different.

Secured LOC

A home equity line of credit loan, or HELOC, is the most common example of a secured line of credit. Although less common, additional examples include a cash-backed LOC secured by a savings account or certificate of deposit or a car loan that affords you the chance to purchase a vehicle up to a certain amount from any car dealer.

During the draw period, you have free access to the LOC; during this time, you might be required to borrow a minimum amount each time you withdraw money or keep a minimum outstanding balance. Borrowing privileges end when the repayment period begins. Loan terms determine the repayment period. With some, the repayment period can extend for a number of years; with others, the LOC must be repaid much sooner because higher interest rate would be charged.

Unsecured LOC

An unsecured LOC is known as a personal line of credit. You can have access to funds at any time and for any reason. As funds are repaid, you can continue tapping into the line of credit loan. A disadvantage to a personal LOC is that eligibility requirements and interest rates are often higher than for a secured LOC.

Line of credit loan can be used as a borrowing option that gives you access to funds whenever you choose up to a predetermined credit limit. With some such arrangements, you access loan funds from a separate checking account. With others, you transfer funds into your checking account. An advantage to a line of credit loan compared to a traditional loan is that no interest is charged on the unused portion of the credit line and in that case less interest has to be given.

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