Although traditional personal loans come with fixed terms, a line of credit allows you to access extra cash anytime you want or need up to your credit limit. It means that you can use this when and as you need it with no need for you to apply for a new loan that will allow more flexibility compared to fixed-term loans.

Lines of credit are loans that offer money to borrowers that they could draw from whenever needed. The moment the borrower draws against the line of credit, it is their responsibility to make regular minimum payments for covering the interest that accrues on the drawn amount. Aside from regular interest payments, the borrowers can also pay back part of the amount their borrowed against the line of credit over time.

In the case of revolving lines of credit, the borrowers can pay down the balance then draw against this again and again for as long as the credit line remains open. It doesn’t matter if you need to cover unexpected expenses, manage daily cash flow, and bankroll business costs, a line of credit could also give you access to the funds you need.

How Does a Line of Credit Work?

Lines of credit give the borrowers access to the specific monetary amount that they could borrow against down the road. The total amount that the lender is willing to offer will depend on several factors such as the creditworthiness of the borrower, ability of repaying the borrowed funds, and income. In order to do this, the lenders evaluate the credit score of the borrower as well as the history of loan repayment and other risk factors that could make it hard to make payments.

Instead of just getting their loan’s full amount upfront and paying it back through fixed payments every month, just like in the case of personal loans or mortgages, borrowers have the chance to withdraw exactly what they need or want over time that is referred to as the draw period. The lines of credit can be non-revolving or revolving and the borrower might be required to offer collateral for securing the loan.

Unlike traditional loans, the interest on lines of credit doesn’t accrue until the borrower has drawn on the line. Even if this is the case, interest is often limited to the amount withdrawn instead of the total credit limit. The moment the draw period comes to an end, the period of repayment starts and it is no longer possible for the borrower to withdraw funds from the credit line. This is the point when the borrower should pay off the accrued interest and outstanding loan principal by the fixed date set in the agreement for the loan.

Where to Use a Line of Credit

A line of credit can be used for pretty much anything, such as home renovations, a new car, or even holidays. On top of it all, you will just pay interest on the borrowed amount and not the entire credit limit. It is also easy to access your money through transferring to the transaction account through online banking and pay for things with ATM withdrawals or direct transfers.