A credit line is a predetermined borrowing limit that can be used at any time. The borrower can withdraw the money as needed until the credit limit is reached, and as soon as the money is repaid it can be borrowed again in the case of an open credit line. A credit line is an agreement between a financial institution – usually a lender in the banking or non-banking sector – and a client that sets the maximum loan amount that the client can borrow.
The borrower may access the funds from the credit line at any time, provided that they do not exceed the contractual maximum amount (or the credit limit is exceeded) and the borrower meets all other requirements, such as making minimum payments on time.
A credit line is a more flexible way to borrow money than a loan
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With a credit line, the lender extends your privilege to borrow up to a certain amount, but you repay the principal and interest only for the amount that you have access to at any given time.
Flexibility and convenience are the main advantages of a credit line, but impulsive spending and unforeseen payments are potential downsides.
Advantages of the credit line:
- Flexible Borrowing – The main value of a credit line against a loan is that you do not have to commit to a certain amount of money in advance. This flexibility is especially useful if you do not have a good idea of how much the project or event you want to invest in the loan will cost. It is also beneficial for ongoing projects or activities where payments are spread over time. By borrowing a loan, you repay the entire amount according to a predetermined schedule. Not only do you have more control over your spending with a credit line, you also have a lot of debt unless you use the full limit.
- Convenience – Credit lines are very convenient to use. Typical lenders provide convenience checks to customers, line to account transfers and access to debit cards. You can also set your line as overdraft protection or use your checking account as line overdraft protection.
Disadvantages of Credit Line:
- Spending from impulse operations – Like other types of revolving credit, open credit lines carry the risk of impulse spending. By taking due care of your project ahead of time and getting a loan, you know where your money is going to go. With the flexibility of a credit line, you have more uncertainty about your spending. This makes it easier to get into unplanned and potentially unnecessary expenses. When it comes to a credit line, discipline is essential.
- Unexpected payments – Uncertainty about the amount borrowed also means the inability to predict the amount of the loan payments. Borrowing increases the loan amount and the monthly payments. Some types of credit lines initially require only interest payments. Although this structure reduces payments, it also delays the repayment of the loan balance. Budgeting for debt obligations is a challenge with such uncertainty.
In the end, we can be unanimous – a credit line is one of the greatest options available to those who need financial support from time to time!