Line of Credit

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Line of Credit

A line of credit is basically a deal between a lender and borrower. Under this deal the customer can borrow up to a certain amount of money at any time.

The difference between a line of credit and a loan is that with a line of credit interest is only charged on credit you use. If you don’t use credit you won’t be charged any interest. In this way a line of credit is like a credit card.

A line of credit is superior to a loan because in most loans you have to pay interest whether you use all of the money or not. One advantage to a line of credit is that it is there in case of emergency or other contingency. Another advantage is that since it’s already set up you can start using it at any time without a loan application

Business Line of Credit

Lines of credit are most commonly used in business. Many businesses have lines of credit set up with banks, suppliers and financial institutions. That way they can use the line of credit at any time if need be.

Some businesses have lines of credit with suppliers, which enables to order a certain amount of supplies on credit each month. Others may get bridge financing which enables them to bridge periods when cash flow is low.

Banks and other financial institutions will often extend lines of credit to businesses that run a lot of money through their accounts. They may for example cover checks or other expenses for businesses they know will pay their bills in a short period.

Line of Credit vs. Credit Cards

The best way to think of a line of credit is that it is like a credit card. As with a credit card you have a certain amount of credit that you can use. If you don’t use the credit you won’t get charged for it. If you use the credit you will get charged for it.

As with credit cards, there are limits on lines of credit. You can spend up to a certain amount of money but not over that amount.

Home Equity Lines of Credit

One line of credit available to homeowners is a home equity line of credit. In this credit you can borrow against the equity in your home. The equity in your home is determined by the difference between the amount your home is mortgaged for and the value of your home. If the value of your home exceeds your mortgage principal you have equity.

The advantage home equity lines of credit have over a mortgage is obvious. You will only be charged interest and face additional debt if you use the home equity line of credit. If you don’t use the whole line of credit you won’t be charged for it.

Many home owners use home equity lines of credit to pay for home repairs, remodeling and other expenses. Businesses can also take advantage of lines of credit based on real estate they own.