What to Know About a Line of Credit

If you start to research various lending options for your personal or professional life, you’ll no doubt come across a lot of options which all vie for your attention. Wading through all of the information can be confusing – so here’s a quick summary of what a line of credit is, how it works and why it’s a good idea.

The Basics

A line of credit, also known as a revolving credit line, is a method of gaining financial support and security. Different types of lines can be used for either personal or business needs. Each of them start with an agreement between a client and a financial institution, which oftentimes is a bank. In a nutshell, you take the funds as needed and pay interest on the sum you use until you reach a predetermined amount of money (for instance, $100,000). Furthermore, with open lines of credit, the funds can be borrowed again once they are repaid – thus keeping an open door between you and the money you require. Lines of credit can either be unsecured (not backed by collateral) or secured.

The Advantages

There are several tangible benefits to this method of financing. To begin with, you will have immediate access to a specified amount of money when you need it. For example, if you run a business, there are all kinds of ways you can put the funds to use, including updating or maintaining your equipment, investing in an exciting, new project, interviewing and hiring more employees, or making up for slower seasons. Additionally, you can use it as an opportunity to build up your credit rating: As you add to your credit history, you’re preparing for future loan applications. After all, if your potential lenders can see that you’ve been consistent with paying on time in the past, it will provide a strong factor in persuading them to let you borrow from their institution. Lines of credit also afford you substantial flexibility in decision-making because you get to receive the funds when you need them and use them for whatever purposes you determine. Finally, you can keep your interest rates low by promptly paying back the funds, and by doing so, those interest rates can turn out to be lower than regular credit card interest rates.

Now you can see why a line of credit is a viable option for either your personal life or your company, and hopefully this summary makes it a little easier for you to decide if it’s the right fit for you.