Term of the Day - 29 February 2024

Today’s Term is “Line of Credit”.

A "Line of Credit" (LOC) is a flexible financial arrangement between a borrower and a lender, typically a financial institution. It allows the borrower to access a predetermined amount of funds, up to a specified credit limit, as needed. Unlike a traditional loan where the borrower receives a lump sum upfront, a line of credit provides ongoing access to funds that can be drawn upon and repaid repeatedly.

Key features of a line of credit include:

1. Credit Limit: The maximum amount that the borrower is allowed to borrow under the line of credit. It is established based on the borrower's creditworthiness and financial situation.

2. Revolving Nature: A line of credit is a revolving form of credit, meaning that as the borrower repays the borrowed amount, the credit becomes available again, allowing for multiple drawdowns over time.

3. Interest Charges: Interest is typically charged only on the amount borrowed, not the entire credit limit. The interest rate may be variable or fixed, depending on the terms of the agreement.

4. Flexible Use: Borrowers have flexibility in using the funds for various purposes, such as working capital, inventory financing, or managing cash flow during periods of fluctuating expenses.

5. Collateral and Terms: Depending on the type of line of credit, it may be secured or unsecured. Secured lines of credit may require collateral, while unsecured lines rely on the borrower's creditworthiness. Terms and conditions vary among lenders.

Lines of credit are valuable financial tools for businesses and individuals to manage short-term financing needs and provide a safety net for unforeseen expenses or opportunities. They offer flexibility and liquidity, contributing to effective financial management.