What is a Line of Credit?
One topic I'm questioned about nearly every day is lines of credit People ask about lines of credit in several different ways too, like the direct "Denzel, what is a line of credit?" or "How do I use a line of credit?" I even have people ask how they obtain a line of credit and what all the different types are.
This made me think that I should dedicate specific videos and blogs to the line of credit. So I decided to make a post explaining what a line of credit is, and your options when it comes to choosing a line of credit.
What is a line of credit? According to Investopedia, a line of credit is an arrangement between a financial institution—usually a bank—and a customer that establishes the maximum loan amount the customer can borrow. 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 agreement and meet any other requirements such as making timely minimum payments.
This is a pretty technical definition, so I want to lay out an example that might help make sense of the definition Investopedia gave us. Let's say I need $10,000, I'm going to ask you for ten grand, but I'm going to say, "Listen, I don't need it all at once, okay? I need two grand today, two grand in two months. Then the rest, three months from now." You basically set 10 grand aside, and I can log in to that money at any time.
Now let's say you're a bank, and I ask you for a $10,000 line of credit. You give me access to $10,000 through a separate account; this account is tied to a business or a personal account. This line of credit account is going to say that I have $10,000 to use whenever I need it. When I take money out, I now owe the bank for the amount I took. Let's say I take out $5,000; I now owe $5,000; even though I can use up to $10,000.
Now here's the best part, with a line of credit, instead of me owing $10,000 to the bank, and having my monthly payment and interest rate based off $10,000, like a loan, my payment and interest rate will be based on the amount I took out, which in this case was $5,000.
If you want to learn more about calculating interest on a Line of Credit, or about what kinds of questions to ask the bank when you want a Line of Credit, watch the video below.
In my next blog, I'm going to be talking about different types of Lines of Credit. I hope this helps you understand more about Lines of Credit vs. Loans.