Line of Credit (LOC) Definition

What Is a Line of Credit?

A Line of Credit, or LOC, is money lent to an individual or business which the borrower pays interest on.

Depending on the type of LOC, the client either receives a lump sum, or is allowed to “draw against”their line of credit to make purchases, until the credit limit is reached.

Typically lines of credit are given by banks, such as when an individual is issued a credit card.

What Is a Line of Credit and How Does it Work? Revolving vs Non-Revolving

Lines of credit will either remain open, or will close, once the loan has been repaid. 

Revolving lines of credit are considered “revolving”because an individual’s credit is replenished when some or all of the outstanding debt has been paid off. 

In contrast, a non-revolving line of credit is closed once the account is fully paid off, such as a student loan or mortgage.

Non-revolving credit usually has a lower interest rate.

How does a Line of Credit Work? Secured vs Unsecured

Loans may be unsecured loans, or secured by collateral. 

A home equity loan is an example of a collateralized loan, whereby the home is the collateral and will be claimed by the creditor in the event of a default on the loan. 

Credit card loans are almost always unsecured, which causes creditors to take on more risk and is why credit card interest rates are generally higher and the borrowing limits are generally lower than secured loans.  

Understanding a Credit Line FAQs