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Secured Line of Credit

A line of credit becomes a secured line of credit when the borrower puts up collateral to secure the line of credit.

Collateral is a piece of property or an amount of money that the lender can seize if the borrower doesn’t pay off the line of credit. Lenders usually demand collateral for a line of credit when a borrower has a bad credit rating or a low income. Some lenders will only issue secured lines of credit.

In a line of credit a lender gives a borrower permission to use a certain amount of credit. The borrower can use as much or as little credit as they want as long as they remain within the line of credit. Once the credit limit has been reached no more credit is available.

The advantage that a line of credit provides over a loan is that the credit becomes available again if it is paid off. A line of credit can be used over and over again while a loan is a one time arrangement. 

How a Secured Line of Credit Works 

The amount of credit available in a secured line of credit is determined by the value of the property or money used as collateral. The amount of credit available is usually a percentage of the value of the property. The amount of credit made available will always be less than the value of the property so the lender can make a profit if it has to sell the collateral.

The lender makes a profit on the secured line of credit by charging interest on the credit made available. The interest is collected when the balance of the credit is paid off. The higher the interest rate the more the credit will cost.

One advantage to a secured line of credit is that those with poor or bad credit will be able to get such lines of credit if they can come with collateral. A wide variety of secured lines of credit are available.

Types of Secured Lines of Credit

There are several kinds of secured lines of credit available that borrowers can take advantage of. The kinds of secured line of credit a person can use will be determined by the kind of collateral they have.

Hard money lenders will give businesses lines of credit in which equipment or inventory is used as collateral. Some hard money lenders will use money in a bank account or future cash flow as collateral. One example of this is an inventory line of credit in which unsold inventory is used as collateral.

Another example is an accounts receivable line of credit in which unpaid customer invoices are used as collateral for a line of credit. In that arrangement, the lender has the right to collect the invoices or sell them to a collections agency to recover its losses.

In a private equity line of credit the entrepreneur puts up a stake in the business as collateral. The lender gets ownership in the business if the line of credit isn’t paid off.

In an equity line of credit, such as a home equity loan, equity in real estate is used as collateral. The lender gets the right to foreclose on the real estate if the line of credit goes unpaid.

Finding a Secured Line of Credit

To qualify for a secured line of credit a borrower will have to have property or funds that can be used as collateral. The borrower should always consider the possibility that they will not be able to pay off the line of credit and forfeit the collateral.