Line of Credit

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Line of Credit Limit

One thing that every borrower needs to understand about a line of credit is that it is a limited source of funding. Most lines of credit will come with some sort of limit that will determine the amount of credit available.

A line of credit only makes a limited amount of credit available to the borrower. When the borrower reaches that limit they have no more credit available until they pay off at least a portion of the line of credit.

This means that a borrower needs to be aware of their line of credit limit and learn to live within it. Borrowers should also realize that some lines of credit come with stricter limits than others. Home equity and real estate lines of credit are often severely limited.

How Line of Credit Limits Are Determined

The line of credit limit is usually determined by a number of factors including the type of line credit, the borrower’s income, the amount of money available and the equity available.

In a bank line of credit the line of credit limit is usually determined by the amount of money a customer runs through their accounts. Businesses that run a lot of cash through their accounts often get a much higher line of credit. Some banks will only extend a line of credit to businesses that keep a minimum amount of money in their accounts.

In a home or real estate equity line of credit the limit is determined by the amount of equity available. Equity is the difference between the value of a property and the amount of debt held against it. For example a home worth $120,000 mortgaged for $80,000 would have $40,000 worth of equity in it.

The homeowner wouldn’t be able to get a line of credit equal to the equity because most equity lines of credit are based on a percentage of the equity usually around 80%. This means the homeowner would only be able to get a $32,000 line of credit on $40,000 in equity.

Private equity lines of credit work in much the same way. The line of credit is limited to a percentage of the equity available. This is done so the lender can recoup its losses if the borrower doesn’t pay the line of credit off

Hard money and cash lines of credit are usually limited by the income or cash flow of the borrower. The line of credit is based on the amount of cash the borrower can demonstrate they have on hand.

Other Line of Credit Limits

Sometimes line of credit limits will also be determined by a borrower’s credit rating. Many lenders will put a credit limit on a borrower with bad credit. Others will put credit line of credit limits on borrowers with low or limited income.

Some lenders might also try to limit what the line of credit is used for. An example of this would be vendor credit which his limited to inventory or supplies.

Determining Line of Credit Limits

Line of credit limits should be laid out in the line of credit agreement. This should tell you exactly what line of credit you have.

A borrower should learn their line of credit limits by heart and learn to live within them.