A line of credit works by allowing you to borrow funds from a revolving pool. You can spend the funds continuously so long as you continue making minimum payments and paying down the balance. Unlike a loan, with a line of credit you only pay interest on funds that you spend. A checking, or overdraft, line of credit is a line of credit attached to your checking account to protect against overdraft charges. An overdraft LOC allows you to only be charged interest on the overdrawn amount, rather than the high overdraft fees you would normally incur.How Does a Checking Line of Credit Work?
How Does a Line of Credit Work? FAQs
A line of credit is a type of borrowing arrangement with a financial institution that provides access to funds when needed up to a designated amount. It offers more flexibility than other loan types since the borrower can draw from their available credit as often as required and only pay interest on the amount they use.
A line of credit differs from other loan types in that it does not require the borrower to make regular payments; instead, they only need to repay what they have borrowed, plus interest. Additionally, there is usually no set borrowing period and borrowers can use the funds as they need, up to their maximum credit limit.
The key advantages of a line of credit include more flexibility than other loan types, only paying interest on what is borrowed, and access to funds when needed. Additionally, borrowers can generally use their line of credit to build their credit rating if they make their payments on time.
The main disadvantage associated with a line of credit is that it can be easy to borrow more money than intended, leading to excessive debt. Additionally, there may be fees for using the available funds and interest rates may be higher than other loan types.
In order to apply for a line of credit, applicants will usually need to provide proof of their income, such as paystubs or tax returns, and a variety of other financial documents. The exact requirements will vary depending on the financial institution. Additionally, applicants may need to provide a personal guarantee or collateral in order to secure the loan.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.
