Definition: A line of credit (LOC) is the maximum amount that a customer has access to and can borrow from a bank on an ongoing basis. In other words, this is an open credit line that allows a customer to continually borrow funds from a bank up to a maximum amount.
What Does Line of Credit Mean?
What is the definition of line of credit? As a rule of thumb, the line of credit is one of the most commonly used ways to finance residential or commercial properties. The legal contract between the bank and the borrower allows the borrower to have immediate access to the funds as long as the determined ceiling in the loan balance is not exceeded.
Also, a LOC allows a greater flexibility as borrowers can adjust their repayment installments based on their existing cash flows and can get the exact amount of funds they need, but they pay interest only on the amount spent.
Let’s look at an example.
Example
Peter wants to get a home equity loan $50,000 to finance his residential property. His lender sets a loan term of 10 years for the repayment of the loan and allows Peter to write checks or use a special credit card associated with the LOC to make his loan payments.
During the term, Peter will be charged with an interest rate of 2% plus a margin for the amount of money that he actually uses towards the financing of the property. For example, if he withdraws $3,000 and he spends $2,000 on the property, he will be charged 2% plus a margin on the $2,000.
In addition, Peter is free to choose how he can make the payments on his home equity loan. His lender has offered him the option of monthly payments on the interest and the principal or payments towards the interest and to pay back the principal at the end of the loan term. A third option involves a comprehensive repayment plan, which will allow Peter to make payments towards the principal of the loan.
Summary Definition
Define Line of Credit: LOC means a short-term loan from a bank typically collaterized with a large, long-term asset.
