Bạn đang xem: Line of credit là gì
Peggy James is a CPA with 8 years of experience in corporate accounting & finance who currently works at a private university.
What Is a Line of Credit (LOC)?
A line of credit (LOC) is a preset borrowing limit that can be tapped into at any time. The borrower can take money out as needed until the limit is reached, và 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. The borrower can access funds from the line of credit at any time as long as they bởi not exceed the maximum amount (or credit limit) mix in the agreement.
A line of credit (LOC) is a premix borrowing limit that a borrower can draw on at any time.Types of credit lines include personal, business, & home page equity, among mỏi others.A LOC has built-in flexibility, which is its main advantage.Potential downsides include high interest rates, severe penalties for late payments, & the potential to lớn overspover.
Understanding Credit Lines
All LOCs consist of a set amount of money that can be borrowed as needed, paid back and borrowed again. The amount of interest, form size of payments, và other rules are set by the lender. Some lines of credit allow you to lớn write checks (drafts) while others include a type of credit or debit thẻ. A LOC can be secured (by collateral) or unsecured, with unsecured LOCs typically subject to lớn higher interest rates.
A line of credit has built-in flexibility, which is its main advantage. Borrowers can request a certain amount, but they vì chưng not have khổng lồ use it all. Rather, they can tailor their spending from the LOC khổng lồ their needs and owe interest only on the amount they draw, not on the entire credit line. In addition, borrowers can adjust their repayment amounts as needed, based on their budget or cash flow. They can repay, for example, the entire outstanding balance all at once or just make the minimum monthly payments.
Unsecured vs. Secured LOCs
Most lines of credit are unsecured loans. This means the borrower does not promise the lenderany collateral lớn bachồng the LOC. One notable exception is a trang chính equity line of credit (HELOC), which is secured by the equity in the borrower"s trang chủ. From the lender"s perspective sầu, secured lines of credit are attractive sầu because they provide a way to recoup the advanced funds in the sự kiện of nonpayment.
For individuals or business owners, secured lines of credit are attractive because they typically come with a higher maximum credit limit and significantly lowerinterest ratesthan unsecured lines of credit. Unsecured lines of credit are also more difficult khổng lồ obtain and often require a higher credit score or credit rating. Lenders attempt khổng lồ compensate for the increased risk by limiting the number of funds that can be borrowed & by charging higher interest rates. That is one reason theannual percentage rate (APR)on credit cards is so high.
Credit cardsare technically unsecured lines of credit, with the credit limit—how much you can charge on the card—representing its parameters. But you vày not pledge any assets when you open the card trương mục. If you start missing payments, there"s nothing the credit cardissuercan seize in compensation.
A line of credit can have a major impact on your credit score. In general, if you use more than 30% of the borrowing limit, your credit score will drop.
Revolving vs. Non-Revolving Lines of Credit
A line of credit is often considered to be a type of revolving tài khoản, also known as an open-end credit tài khoản. This arrangement allows borrowers to lớn spover the money, repay it, & spend it again in a virtually never-ending, revolving cycle. Revolving accounts such as lines of credit & credit cards are different from installment loans such as mortgages & oto loans.
With installment loans, consumers borrow a mix amount of money and repay it in equal monthly installments until the loan is paid off. Once an installment loan has been paid off, consumers cannot spend the funds again unless they apply for a new loan.
Non-revolving lines of credit have the same features as revolving credit (or a revolving line of credit). A credit limit is established, funds can be used for a variety of purposes, interest is charged normally, and payments may be made at any time. There is one major exception: The pool ofavailable creditdoes not replenish after payments are made. Once you pay off the line of credit in full, the account is closed và cannot be used again.
As an example, personal lines of credit are sometimes offered by banks in the size of an overdraft protection plan. A banking customer can sign up lớn have sầu an overdraft plan linked to his or her checking tài khoản. If the customer goes over the amount available in checking, the overdraft keeps them from bouncing a kiểm tra or having a purchase denied. Like any line of credit, an overdraft must be paid bachồng, with interest.
Types of Lines of Credit
LOCs come in a variety of forms, with each falling inkhổng lồ either the secured or unsecured category. Beyond that, each type of LOC has its own characteristics.
Personal line of credit
This provides access to lớn unsecured funds that can be borrowed, repaid, and borrowed again. Opening a personal line of credit requires a credit history of no defaults, a credit score of 670 or higher, and reliable income. Having savings helps, as does collateral in the size of stocks or CDs, though collateral is not required for a personal LOC. Personal LOCs are used for emergencies, weddings và other events, overdraft protection, travel and entertainment, and lớn help smooth out bumps for those with irregular income.
trang chủ equity line of credit (HELOC)
HELOCs are the most common type of secured LOC. A HELOC is secured by the market value of the trang chính minus the amount owed, which becomes the basis for determining the form size of the line of credit. Typically, the credit limit is equal khổng lồ 75% or 80% of the market value of the home page, minus the balance owed on the mortgage.
HELOCs often come with a draw period (usually 10 years) during which the borrower can access available funds, repay them, và borrow again. After the draw period, the balance is due, or a loan is extended khổng lồ pay off the balance over time. HELOCs typically have sầu closing costs, including the cost of an appraisal on the property used as collateral.
Since the Tax Cuts và Jobs Act of 2017, interest paid on a HELOC is only deductible if the funds are used to lớn buy, build or substantially improve theproperty that serves as collateral for the HELOC.
Demand line of credit
This type can be either secured or unsecured but is rarely used. With a demvà LOC, the lender can Hotline the amount borrowed due at any time. Paybachồng (until the loan is called) can be interest-only or interest plus principal, depending on the terms of the LOC. The borrower can spkết thúc up lớn the credit limit at any time.
Securities-backed line of credit (SBLOC)
This is a special secured-dem& LOC, in which collateral is provided by the borrower’s securities. Typically, an SBLOC lets the investor borrow anywhere from 1/2 to 95% of the value of assets in their tài khoản. SBLOCs are non-purpose loans, meaning the borrower may not use the money to buy or trade securities. Almost any other type of expenditure is allowed.
SBLOCs require the borrower lớn make monthly, interest-only payments until the loan is repaid in full or the brokerage or ngân hàng demands payment, which can happen if the value of the investor’s portfolio falls below the màn chơi of the line of credit.
Business line of credit
Businesses use these khổng lồ borrow on an as-needed basis instead of taking out a fixed loan. The financial institution extending the LOC evaluates the market value, profitability, & risk taken on by the business & extends a line of credit based on that evaluation. The LOC may be unsecured or secured, depending on the form size of the line of credit requested & the evaluation results. As with almost all LOCs, the interest rate is variable.
Limitations of Lines of Credit
The main advantage of a line of credit is the ability khổng lồ borrow only the amount needed và avoid paying interest on a large loan. That said, borrowers need to be aware of potential problems when taking out a line of credit.
Unsecured LOCs have higher interest rates and credit requirements than those secured by collateral.Interest rates (APRs) for lines of credit are almost always variable and vary widely from one lender to another.Lines of credit do not provide the same regulatory protection as credit cards. Penalties for late-payments và going over the LOC limit can be severe.An open line of credit can invite overspending, leading lớn an inability lớn make payments.
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