• What is a line of credit?
• Differences between a line of credit and a loan

We explain what a line of credit is and some of its characteristics. Also, its difference with a loan.

The checking line often operates as a credit backup to checking accounts.

What is a line of credit?

A credit line is known as a credit tool offered to governments, Business or individuals by banks or financial consortiums, in which a total amount is stipulated in advance that is made available to the applicant, usually in a bank account or some financial instrument, from which funds may be available until the ceiling is reached.

The credit line has the virtue of being paid interests only for the amount withdrawn and not for the total amount of the agreed loan.

Often these types of financial tools require collateral: an asset that serves as a guarantee for the payment of money and that acts as a guarantee to access credit. This is because next to capital borrowed, the applicant must return interest and stipulated commissions, and all in a certain period of time and with a certain periodicity.

In common banking, credit lines are known ascredit accounts and often operate as a credit enhancement to current accounts or checkbook. In this way, if the account holder writes a check or makes a payment and his balance is not enough to cover the requested amount, the check is not returned or the transaction is rejected, but it is covered with money from the line of credit, which must then be paid to the bank according to specific conditions; a bit like credit card use.

Differences between a line of credit and a loan

In most loans, the amount determined at the time of your request is given.

While loans and lines of credit are forms of passive, that is, forms of money loan, there are important differences between both concepts, such as the following:

• Money delivery. In most of the loans, the applicant is given a specified or requested amount at the moment of his application, under the commitment payment of the requested amount plus interest and commissions, according to a term and a payment frequency. In the line of credit, on the other hand, a maximum limit of money is established and the applicant is lent as much as he wishes (below the limit, obviously) and interest and commissions are charged only for the amount withdrawn, not for the total set .
• Return of the money. As in the previous point, the loans are charged in full at the time of maturity, unless there has been a previous amortization; while lines of credit charge the requested balance at the time of maturity, which may be much lower than the maximum limit set.
• Interest rate. The amount charged for interest on a loan is always less than that established for lines of credit. In addition, in many lines of credit you must pay a commission of services for the amount not yet requested, to guarantee its availability.
• Renewal. Lines of credit can be renewed as many times as desired, as long as the credit issuing entity endorses it; While loans cannot be extended or renewed: they must be paid at the end of the fixed term, in any case they can be paid with money from a new loan that would replace it.