How Does a Line of Credit Work

In the tough economic times we live in, everyone is looking for ways to manage their finances more efficiently and effectively. One of the most well-established ways of doing so is by relying on financial institutions of all sorts to help us meet the financial obligations, emergencies, and necessities that come about as a part of normal life.

How It Works

One of the most effective, but perhaps lesser-known, methods of keeping up with the bills is through the establishment of a line of credit. Everyone with a bank account of some sort knows all about regular loans and overdrafts, but this is something rather different from these. Let’s take a closer look at this particular financial measure, just how it works, and the various types that exist. It might be just what you need to get you safely across whatever financial squeeze might be worrying you.

In basic terms, you might describe a line of credit as a pool of money that’s readily available for you to borrow from. While this may sound a lot like a regular type of loan, there is a great difference between the two. Whereas loans involve taking out a certain sum of money from the financial institution offering you the loan all at once, credit lines allow you the flexibility to take out just what you need, when you need it, up to a certain point which you agreed upon beforehand. It’s a great way to tackle large and somewhat unexpected or unpredictable expenditures. These might include medical expenditures that fall out of your insurance cover, extended college costs, property renovations, and many similar circumstances.

What makes them particularly attractive to the prudent applicant is the fact that interest payments are pegged on the amount of money you actually take out. In the case of traditional, lump-sum loans, you begin paying interest on the full amount from the very day you receive the funds in your account, regardless of whether you spend the money immediately or not. It’s easy to see how it will be cheaper to apply for a line of credit which you can withdraw from in stages as you require the money and pay interest that grows at a similar pace. It’s quite simply a cheaper way of accessing loan facilities.

Additionally, lines of credit will usually come with friendlier (lower) interest rates as well as higher limits to them.

The Credit Line Types

There are two main types to consider here:


These are similar to secured loans, meaning that they have tangible collateral behind them such as real estate or other property of value such as cars or artwork. These will enjoy the lowers interest rates owing to the fact that the financial institution has a guarantee of recovering their money in case the client does not pay them as promised.


These, on the other hand, will have relatively higher costs attached to them due to the lack of collateral.
The facts speak pretty well for themselves when it comes to credit lines. They are a great way for individuals, small businesses, and organizations alike to manage the costs of borrowing money. This in turn makes them a valuable aid in the never-ending effort to maintain a healthy financial status.