What Is a Line of Credit? 

A line of credit (LOC) offers a flexible borrowing option that can be a smart alternative to traditional loans. Whether you’re facing unexpected expenses or need ongoing access to cash, a line of credit can help bridge the gap without requiring you to borrow a lump sum all at once.

In this guide, we’ll explain how lines of credit work, the different types available, how repayment functions, and whether it’s the right borrowing tool for your situation.

Key Takeaways

• A line of credit is a revolving loan that lets you borrow, repay, and reuse funds up to a credit limit.
• There are several types—including personal, business, and home equity lines—with different features and requirements.
• LOCs offer flexibility, but require financial discipline and careful repayment.

What Is a Line of Credit?

A line of credit is a revolving loan that allows you to borrow money up to a preset limit, repay it, and borrow again as needed. You only pay interest on the amount you use, not the full credit limit.

Think of it like a credit card: you have a maximum limit, and as long as you stay within that limit and make payments on time, you can keep using it.

How Does a Line of Credit Work?

Here’s a basic breakdown:

1. You apply for a line of credit through a lender.
2. You're approved for a certain credit limit (e.g., $1,000 to $25,000).
3. You draw funds as needed, not all at once.
4. You repay the borrowed amount plus interest or fees.
5. You can reuse the credit as long as the account remains open and in good standing.

Line of Credit vs. Traditional Loan

A line of credit is very different than a personal loan. Here are some things to keep in mind:

Line of Credit	Traditional Loan
Flexible access to funds up to a credit limit	Fixed lump-sum disbursement
Interest is charged only on what you use	Interest is charged on the full amount borrowed
Revolving (can be reused)	One-time use; closed after repayment
Minimum monthly payments vary	Fixed payment schedule

Types of Lines of Credit

Here are four different lines of credit to know:

1. Personal Line of Credit

• Unsecured (no collateral needed)
• Based on credit score and income
• Used for personal expenses, emergencies, or debt consolidation

2. Home Equity Line of Credit (HELOC)

• Secured by your home’s equity
• Typically has lower interest rates
• Often used for renovations or large purchases

3. Business Line of Credit

• Helps business owners cover short-term expenses
• May be secured or unsecured
• Useful for inventory, payroll, or seasonal needs

4. Credit Card (Revolving Credit)

• A form of line of credit with regular billing cycles
• Often includes rewards or perks
• Typically has higher interest rates than personal LOCs

Pros and Cons of a Line of Credit

Every financial product has pros and cons, and it is important to know when to use the right one. Here are the pros and cons about a line of credit:

Pros	Cons
Flexible access to funds	May include high interest or fees
Pay interest only on the amount used	Risk of overspending or mismanaging funds
Can be reused after repayment	May require strong credit to qualify
Useful for emergencies or uneven cash flow	Variable payments can be harder to budget

How Repayment Works

Repayment terms vary depending on the lender and type of LOC, but typically include:

• Monthly minimum payments: May include interest-only or a portion of the principal
• Interest rates: Fixed or variable, depending on your agreement
• Draw period and repayment period: Some LOCs have a draw period where you can access funds, followed by a repayment-only period

Failing to repay on time may result in late fees, increased interest rates, or closure of your account.

Requirements to Qualify

While requirements vary by lender, most lines of credit are approved based on:

• Higher credit scores are more likely to qualify
• Income and employment status
• Debt-to-income ratio
• Credit history

Secured lines of credit (like HELOCs) also require collateral and may involve home appraisals or title checks.

When To Use a Line of Credit

A line of credit can be a good option if:

• You have ongoing or unpredictable expenses
• You don’t want to borrow a lump sum up front
• You’re able to repay flexibly
• You want a safety net for emergencies

It may not be the best choice if you require a large, one-time loan or struggle with budgeting and self-discipline.

Line of Credit vs. Personal Loan: Which Is Better?

As we stated above, making good financial decisions is knowing what you need when you need it.

Use a Line of Credit If...	Use a Personal Loan If...
You want to borrow only as needed	You need a lump sum for a specific purpose
You have unpredictable or fluctuating expenses	You want fixed payments and terms
You want to reuse the credit in the future	You prefer a closed-end loan with a clear payoff schedule
You’re confident in managing flexible debt	You want structure and simplicity

Note: The content provided in this article is for informational purposes only. Contact your financial advisor regarding your specific financial situation.