Line of Credit

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Line of Credit Loans

Many people confuse lines of credit with loans because the two methods of finance are similar. After all a line of credit is issued by a lender, it has to be paid back and interest is charged on it.

To add to the confusion lines of credit are sometimes called loans. One term used to describe lines of credit is revolving loans, another is open ended loans. These terms refer to the fact that a line of credit remains available to a borrower as long as they haven’t used up all the credit. A borrower can also reopen a line of credit by paying off some of the credit.

Despite the similarities and the confusion, a line of credit is not a loan. It is an agreement under which a lender makes a set amount of credit available to a borrower. The borrower agrees to pay back any money used with interest as long as the agreement is in effect.

Lines of Credit and Loans

A line of credit is not a loan because once a loan has been paid back it ceases to exist. A line of credit remains open as long as the agreement that created it is in effect.

Another difference between a line of credit and a loan is that a loan is for a specific amount of money lent at one time. A line of credit is for money that can be potentially lent. In a line of credit the borrower is under no obligation to use the credit and only obligated to payback what has actually been used.

A line of credit is a far more flexible and versatile arrangement than a loan. That is why most business funding is done through lines of credit.

Another difference between a line of credit and a loan is that a line of credit maybe made available with another means of financing. For example a mortgage may include an equity line of credit and business bank accounts often come with a line of credit.

Hybrid Lending Arrangements

A lender may sometimes offer a hybrid kind of financing where a loan of money is combined with a line of credit. An example of this would be a loan of $2,000 with an additional line of credit attached to. This can be considered a line of credit loan.

A borrower may request this arrangement when they are involved in an activity such as construction or remodeling where additional funds in excess of the loan amount maybe required in the future. This arrangement gives the borrower the money they need now and gives it the right to request more funds in the future.

Many business loans may come with a line of credit attached to them. Some banks will make lines of credit available to established customers that borrow a lot of money.

Online lenders may make lines of credit available to cash and hard money loan customers with a good history of repaying those loans.

Line of Credit Loan Consolidation

 Borrowers will sometimes consolidate loans and lines of credit as well. Consolidation occurs when a borrower gets a new line of credit or loan and uses it to pay off existing debts. This is usually done because the new line of credit loan offers a lower interest rate than an existing one.