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What Is a Line of Credit?

Monday, 01 Nov 2010 04:55 PM

It is a general tendency of borrowers to seek loans when they need funds. The entire loan-grant process, from application to disbursal, is usually a time-consuming exercise even when the borrower is in urgent need of money. The borrower can, however, do away with this loan processing time, through a line of credit.
A line of credit is an arrangement under which the lender promises to provide a loan for a predetermined amount without going through the entire process of filing applications and seeking approval. It also allows the borrower to save on interest costs; interest is levied only on the disbursed amount, and not on the entire line of credit.
Depending on what they want, a borrower can choose either a secured or unsecured line of credit. These options include business lines of credit, personal lines of credit, and home equity lines of credit.
Home equity lines of credit are secured by the equity value of the borrower's home. This allows a borrower to get a loan up to the equity value of their home. If the homeowner already has a mortgage, the equity value of the home is determined as the difference between the market value of the home and the loan amount secured by the existing mortgage. This is called a secured line of credit, as the home equity is used as collateral for these loans.
On the other hand, an unsecured line of credit allows you to get a loan without any collateral. However, such a line of credit generally requires a good credit score because the risks are higher for the lender. For businesses, an unsecured line of credit requires good business credit scores.
A business line of credit is essential for most businesses to run without worrying about regular cash flow. The business line of credit generally depends on the financial accounts of the business, such as the past revenue and the projected financial profits.
At the same time, collateral is generally not required for a personal line of credit, which can be tapped by individuals in times of emergencies like job loss or other sudden loss of income.
However, those with a bad credit profile might find it difficult to secure a line of credit. The interest rates could be higher and the terms and conditions could be relatively more stringent. The lenders might ask for collateral for a bad credit line of credit. Such borrowers can seek a secured line of credit backed by savings and deposits.
There are a number of “line of credit calculators” to determine the maximum loan amount that can be given. For example, you can get to know your home equity line of credit with this calculator after providing details like your existing loan and the market value of your home.

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