What Is A Line of Credit? Types and Examples
Everyone should adopt a simple lifestyle. Don’t try to live a hedonistic lifestyle you can’t afford. Someone who follows this lifestyle without having proper income can be trapped in debt.
It is recommended to borrow money to develop a business rather than to use it as a hedonistic lifestyle. Anyway, you should remember to calculate it first so that you can be sure you will get the profit. If you plan to borrow money, you can try to understand the line of credit. Here is the explanation!
The Definition of a Line of Credit (LOC)
Not everyone is familiar with this term. However, many people are implementing this system. The definition of “line of credit” is the lending of money to customers with specific limits. Borrowers can still borrow money again after repayment.
LOCs are established by the bank, which then offers this service to customers. From this, we can understand that the bank acts as the lender. Lenders have the authority to determine the amount of money they wish to lend to customers. It is usually based on the customers’ cash flow.
In any case, customers should understand that there are unsecured and secured LOCs. Unsecured loans mean that the customer does not need to provide collateral to the lender. This type of LOC requires a higher credit score compared to an unsecured LOC.
On the other hand, with a secured LOC, the lender can utilize the collateral in case of non-payment. An example of an unsecured LOC is a credit card. If someone uses a credit card and fails to repay the borrowed amount, their credit cards will be imposed fines for late repayments.
The Type of LOC
There are several types of LOC. Here’s the details of each type of LOC!
1. Revolving and non-revolving LOC
The customers can borrow money and repay it in installments. They can borrow a specific amount of money, and once the limit is reached, customers are required to make installment payments. The lender will not provide new loans until customers have fully paid off the installments and applied for a new loan. An example of it is a car loan.
Next, we will explain non-revolving LOCs. Non-revolving LOCs have similar features to revolving LOCs. Customers can use the LOC for any shopping purpose. However, unlike revolving LOCs, different customers are not allowed to use the same account once they have repaid the loan. Non-revolving loans are offered to customers as protection loans.
2. Personal Lines of Credit
There is another type of LOC called “personal lines of credit.” Customers can borrow money, repay it, and borrow money again. Everyone who wants to borrow a personal LOC must have a high credit history, with a credit score of at least 670 or higher.
They should also have a reliable income. It will be easier for people who work in an office to have a reliable income. Nowadays, you can apply with certain requirements. Remember to use borrowed money wisely and avoid wasting it on unnecessary stuff.
Interested in Line of Credit?
A line of credit can be a valuable financial tool that provides flexibility, access to funds, and lower interest rates compared to other forms of borrowing. Whether you’re facing personal expenses, managing business needs, or tackling home improvements, a line of credit offers a convenient and reliable source of funds. However, it’s essential to use it wisely, set a budget, monitor your spending, and make timely payments to ensure a positive borrowing experience.
If you want to learn more about economics, business, and how to make money online in Nigeria, make sure to check the tips in Vincoguide. We also provide several business related articles you should read to be rich.
