Definition of Line of credit

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What is Line of credit (LOC)?

A line of credit, also known as LOC is generally an unsecured loan.

A LOC gives a borrower the right to borrow and draw funds at any time to meet immediate needs.

A significant condition of a line of credit is it’s maximum limit. Borrower can take money out up to that limit and after repayment, he can borrow repeatedly.

Needless to say, line of credit is a convenient source of short-term funds for businesses as well as individuals. Now, who offers this credit facility and lend the money? And what are the terms and conditions?

Line of credit is an agreement between a financial institution and its client that authorizes the client to borrow up to the maximum amount set in the agreement.

Terms and conditions of an LOC:

  • Maximum limit – the highest limit of credit
  • Interest rate – applicable rate of interest on the utilized amount
  • Credit period – repayment period, how long the client can use the money before payment

Line of credit example:

A typical example of line of credit is bank credit/loan. The amount made available by the bank considering the creditworthiness of the customer.

The customer can use the money anytime according to his needs. Customer is required to repay the amount used along with interest and any other charges if applicable.

Depending on the terms of LOC, the repayment can take place in a single payment or in periodic installments of a constant amount.

Line of credit usually does not have a time limit. It will remain active until the bank decides to revoke or the client request for revocation.

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