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What is a 'Line Of Credit - LOC'

A line of credit, abbreviated as LOC, is an arrangement between a financial institution, usually a bank, and a customer that establishes a maximum loan balance that the lender permits the borrower to access or maintain. The borrower can access funds from the line of credit at any time, as long as he does not exceed the maximum amount set in the agreement and as long as he meets any other requirements set by the financial institution, such as making timely minimum payments.

BREAKING DOWN 'Line Of Credit - LOC'

The main advantage of a line of credit is its built-in flexibility. Borrowers can request a certain amount, but they do not have to use it all. Rather, borrowers can tailor what they spend to their needs, and they only have to pay interest on the amount they spend, not on the entire credit line. In addition, consumers can also adjust their repayment amounts as needed, based on their budget or cash flow. For example, borrowers can repay the entire outstanding balance at once, or they can opt to just make the minimum monthly payments.

Revolving Accounts

A line of credit is a type of revolving account. This means that the borrower can spend the money, repay it and spend it again, in a virtually never-ending, revolving cycle. Revolving accounts such as lines of credit and credit cards exist in contrast to installment loans such as mortgages, car loans and signature loans. With installment loans, consumers borrow a set amount of money, and they repay it in equal monthly installments until the loan is paid off. Once an installment loan has been paid off, the consumer cannot spend the funds again unless he applies for a new loan.

Unsecured LOCs Versus Secured LOCs

In most cases, lines of credit are unsecured loans. This means that there is no collateral backing them. However, there is one notable exception, which is a home equity lines of credit (HELOC). This line of credit is secured by the equity in the borrower's home, but it works exactly like any other line of credit.

Demand Line of Credit

A demand LOC is a rare type of credit line in which the lender can call the loan due at any time. As with a standard LOC, the lender sets a maximum amount the borrower can spend, and the borrower can spend any amount up to the limit. With demand loans, the borrower may make small monthly payments, or he or she may simply wait until the lender demands repayment.

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