An Introduction To Line Of Credit

Line of credit can be described as LOC shortly sometimes. A line of credit is a type of arrangement that happens between a financial institution such as a bank and a customer. In order to have this type of arrangement the customer should have a maximum loan balance that is permitted by the lender. In simple words, the customer should have a loan balance that is accepted by the financial institution in order to have access to the line of credit. The customer can have access to the funds until he reaches the maximum amount that is decided by the institution and the customer. This amount that is decided is mentioned in the contract that is signed by both parties. The agreement can also have some other requirements in addition to the maximum amount that can be used. If the other requirements are not met, the person might no longer use the funds. The other requirements can be like the customer paying minimum payments at decided intervals to have the line of credit active.

Breaking down of the LOC

The main advantage of an LOC is seen in its built in flexibility. The amount that the borrowers spend can be solely decided by them. They can request for a loan of certain amount. Once they decide the amount that they want to spend from the money that is borrowed, they can keep the remaining money for future use. The main advantage of this is that the borrower will be obligated to pay the interest for the amount that he/she has spent. The interest does not have to be paid for the total amount that is borrowed. This original amount that was requested is called as the entire credit line of the borrower. The other plus point of line of credit is that the customer or the borrower can adjust the amounts that are to be repaid. They can adjust this as they see fit. This decision is taken mainly based on the budget or the cash flow of the borrower. If a borrower has enough funds to pay the entire outstanding money at once they can do it. If this is not the case, the borrower can just pay the minimum amount that has to be paid compulsorily. This makes sure that there is no pressure on the borrower in making the payments. These minimum payments should be made on a timely basis.

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