Line Of Credit - 15 Mints Seminar Notes

 Line Of Credit - 15 Mints Seminar Notes

DEFINITION

A line of credit is a credit facility extended by a bank or other financial institution to a government, business or individual customer that enables the customer to draw on the facility when the customer needs funds.

In many ways, a personal line of credit resembles a credit card:

• There’s a specific amount you can borrow against (much like the limit on most credit cards)
  
• You may use it for any purpose
  
• You may pull the trigger as it’s needed
  
• And in most cases, as you pay off the balance, you free up the loan amount to borrow against again.

Line of Credit Types

As noted above, lines of credit come in two types:

• Unsecured  
  
• Secured.
  

The first relies entirely on your perceived ability to make repayment that lenders get by reviewing your credit score, credit history, and provable income.

The other backstops the loan with something of equal or greater value like your home or some other form of property.    

Personal Line of Credit 

• Similar to a personal loan or a credit card, an unsecured personal line of credit gets green-lighted based on the applicant’s ability to repay the debt. Your credit score, credit history, and income. 
• Uses for a personal line of credit:
  
• Emergency expenses: The roof springs a big leak; your car’s transmission blows up; medical bills.
  
• Long - term projects: renovating a kitchen, adding a mother-in-law suite, paying for college or a wedding, restoring that 1957 Corvette.
  
• Cash - flow management: bridging the gaps for earners of irregular income.
  
• Debt consolidation: grouping credit card and other consumer debt into a single loan.
  
• Rare life experiences: the cruise of a decade; playing the great golf courses of Scotland; taking a French cooking school vacation; restoring that 1957 Corvette (but we repeat ourselves).
  

Home Equity Line of Credit

A home equity line of credit — HELOC — is a loan secured by the equity in your house: that is, your home’s value minus its outstanding mortgage balance.

Business Line of Credit

Not to be confused with a traditional term loan, which provides a single, upfront lump sum that’s repaid over a specific period (or term), a business line of credit works like other lines of credit: Reuse and repay as often as you like, as long as your account is in good standing and you don’t exceed your credit limit.

Secured vs. Unsecured Credit Lines

A secured credit line is one in which the borrower uses an asset, usually a car or home, as collateral to secure the loan. The lender can seize the asset if the borrower doesn’t repay the debt according to the terms. Because they are defended against loss, creditors usually offer lower interest rates, higher spending limits, and better terms on secured lines of credit.

Revolving vs. Non-revolving Lines of Credit

• Open-end credit is better known as revolving credit. Credit cards are the most used form of revolving credit, requiring the borrower to pay at least a minimum amount of the total owed each month.
  
• Generally, a loan that allows the consumer to borrow portions of the credit limit, charges interest only on the outstanding balance, and frees up credit as the balance is paid down, amounts to revolving/open - end credit.
  

Similarities and Differences with Other Loans

• A personal line of credit has many similarities to credit cards, personal loans, a home equity line of credit, and payday loans, but enough differences to make it a distinctive form of borrowing worth investigating when you need money quickly.
  
• For example, a personal LOC functions just like a credit card in that you can use it for almost anything, get a monthly statement showing your expenses, interest charges, amount owed, and minimum payment due, but is different in that the interest rate for an LOC is typically lower and the credit limit is much higher.
  
• There are many differences between a line of credit and personal loans, the primary one being that money is disbursed on a draw as needed in an LOC, while money in a personal loan is disbursed all at once. The interest rate on a LOC is variable; you pay it only on the portion of funds you use. A personal loan usually carries a fixed interest rate and monthly payments are made on the balance owed
  

   

Presented By,

Sivaranjini

Banking Student

Magme School Of Banking