DEFINITION of 'Revocable Line Of Credit'

A revocable line of credit is a source of credit provided to an individual or business by a bank or financial institution, which can be revoked or annulled at the lender's discretion or under specific circumstances. A bank or financial institution may revoke a line of credit if the customer's financial circumstances deteriorate markedly, or if market conditions turn so adverse as to warrant revocation, such as in the aftermath of the 2008 global credit crisis. A revocable line of credit can be unsecured or secured, with the former generally carrying a higher rate of interest than the latter.

BREAKING DOWN 'Revocable Line Of Credit'

Notwithstanding its revocable nature, a revocable line of credit offers a bank's clients financial flexibility since interest is paid only on the actual amount of funds drawn down. Another attractive feature of this line of credit is its revolving nature, with the full amount being available to the client once all advances under it have been repaid.

Home Equity Lines of Credit (HELOCs) were very popular in North America during the real estate boom of 2002-06. However, as housing prices collapsed and homeowners' equity shrank drastically, some lenders increasingly resorted to reductions and revocations of such credit facilities.

As an alternative, a business that didn't want to the possibility of a credit facility being taken away could use an irrevocable line of credit. However, the added certainty would come at a cost, as an issuing bank will charge a fee for lines of credit which have not been utilized. Thus, many businesses who require standby credit facilities must weight the certainty but expensive irrevocable line versus the cheaper but revocable form.

Many financial institutions tread lightly when issuing these specialized forms of credit; they can bring on unwanted publicity during legal disputes or harm relationships with clients or potential clients.

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