What is a "Line of Credit"?

A Line of Credit is basically like a credit card in that you apply to have the ability to borrow money whenever you want and have a set limit that you are authorized to use (let’s use $10,000 as an example).  The Line of Credit remains open even when your balance is $0 – and you have no payments to make. If you were to use $5,000 then you would start to be charged interest.  You could pay back the $5,000 right away or you could pay it back over time, the only thing you have to make certain is that you pay the interest monthly. So if your line of credit had a 10% interest rate you would owe a minimum of ($5,000 x 10% / 12) = $41.67 per month. You could take until eternity to pay it off in full if you wanted to so long as you made the interest payments.

The interest rate on the line of credit is usually very good. It is usually at the prime rate (the interest rate offered to the bank’s best customers) if it is secured, or “prime plus 1″ or “prime plus 2″ if it is unsecured.  The “plus” amount varies depending on how credit-worthy the bank thinks you are.

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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