Line of Credit
Line of Credit vs Loan FAQs
A line of credit is an agreement with a financial institution that allows you to borrow up to a certain amount whenever you need it while paying interest only on the amount you use. A loan, on the other hand, is a lump sum given to you when the contract is signed and must be paid back in fixed payments over time.
A line of credit works by allowing customers to withdraw funds from their account when needed, up to the maximum limit set by their lender. Interest will only be charged for amounts drawn down from the account and not for any unused portion of the limit. Repayment of the borrowed funds is usually required every month.
A line of credit offers flexibility compared to other types of financing, allowing customers to withdraw and repay funds as needed without paying interest on any unused portion of their limit. In addition, customers can typically access larger amounts than they would be able to with a loan or other type of financing.
One disadvantage associated with a line of credit is that it often carries higher interest rates than traditional loans, making it more expensive in the long run if not managed carefully. Additionally, customers may be tempted to overspend if they have access to a larger amount of funds than they can realistically afford to repay.
The type of financing that's best for you will depend on your individual needs and situation. In general, lines of credit are better suited for short-term needs (e.g., seasonal purchases or unexpected expenses) due to their flexibility and the ability to access large amounts of funds quickly. Loans may be more suitable for longer-term needs (e.g., financing home improvements or purchasing a car). It is important to compare rates and repayment terms before making any decisions.
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.