ISSUE #3: LINE OF CREDIT
A line of credit is a credit facility extended by a bank or other financial institution to a customer, that enables the customer to draw on the facility any time the customer needs funds. The customer could be a government, business or individual.
A line of credit is an arrangement between a financial institution, majorly a bank, and a customer that establishes the maximum loan amount a customer can borrow. Thus, the borrower can access funds from the line of credit at any time as long as they do not exceed the maximum amount or credit limit set in the arrangement and meet any other requirements such as making timely minimum payments.
A line of credit could be an overdraft limit, demand loan, special purpose, export packeting credit, term loan, discounting, purchase of commercial bills, traditional revolving credit card account etc. It is affectively a source of funds that can be effectively be tapped at the borrower’s discretion.
1. Unlike personal loans, borrowers are only charged interest on the funds they draw.
2. The interest rate is often lower than that of a one time loan.
3. It also has built in flexibility in the sense that borrowers can request a certain amount, but they don’t have to use it all at once.
Lines of credit can be secured and unsecured. They are secured when the borrower provides a collateral by backing it up with a valuable asset or by other means. They are unsecured when they are not backed up with any security. There is no promise of collateral. The interest rate on a secured line of credit is usually much lower than that of an unsecured line of credit.
“Mr. Johnson asked the bank to open a new line of credit for him.”
“The newspaper said the bank provided a $380 million loan to the company and a $75 million line of credit.”
See you next week on the next issue of Finance “Yoga”. Remember, finance is not that hard.
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