It is difficult to define credit lines without knowing the specifics, since there are so many different types of credit lines available nowadays. They do not all follow the same set of shared rules. Nevertheless, the credit line, aka the line of credit (LOC) loan in general can be defined as a kind of preapproved, waiting loan. As soon as the customer opens a line of credit with the credit line provider, the preapproved and predefined amount of money becomes available to the customer.
Introduction to Credit Lines
Whereas most short term and long-term loans will be credited to the loanee’s bank account soon after approval, a credit line does not work that way. Instead of receiving the preapproved loan in your bank account, you will have it waiting for you to use on an as needed basis. They do not come with a traditional payback tenure because you won’t need to pay back anything unless you borrow from your line of credit.
For example, $30,000 is an average credit line limit for personal use, which will become available for use as soon as your application is accepted. If you spend $10,000 from your credit line, you will only need to pay the lender back $10,000 + interest + additional charges, as applicable. You will have the remaining $20,000 at your disposal, but the credit line provider will only charge you for the $10,000 that you actually used from your preapproved credit line limit. This is the reason why credit lines are often called waiting loans.
Just because you have been granted $30,000 as a line of credit, it does not mean you will have to pay interest for any amount that you did not yet use. In fact, a line of credit will often remain unused for a long time after its initial approval. However, do look out for the annual fees because they can be deceptively high at times.
Some customers prefer to only tap into their credit lines during emergencies, or to meet an urgent and unplanned expense, rather than using the waiting loan more frequently. Business users, on the other hand, use their credit lines more as revolving loans to always maintain a healthy cashflow even in between payments. Now that you have a decent idea about credit lines and what they mean, it’s time to take a closer look at the different types of credit lines.
Secured Credit Lines
A secured credit line is one where the lender opens your line of credit after accepting a collateral or backstop of some kind, such as a fixed deposit or a piece of real estate that you own. Being a secured loan, the credit line will most likely have a maximum limit that’s close to but less than the collateral’s full financial value.
These are called secured lines of credit because the lender can never really lose the amount that they loaned out. Although it’s not as easy to do as it used to be, the lender may have the option to liquidate the collateral asset in case the borrower fails to pay them back, and the two parties cannot reach an agreement.
Unsecured Credit Lines
An unsecured credit line or any other kind of unsecured loan is contingent upon the lender’s perception of the borrower’s ability to pay the loaned amount back with interest. Therefore, both individuals and businesses with a regular source of income do not need a collateral or security deposit to get approved for an average credit line limit
The lender decides on the credit line’s maximum limit based on several factors such as the applicant’s annual income, credit history and credit score. Take a look at this post on Tally to know more about the maximum and the average credit line limit in the United States. You will be able to check your own eligibility to open a new line of credit with them. If you are eligible, Tally will show you the maximum limit, rate of interest, and everything else one may need to make an informed decision.
Personal Credit Line
Personal credit lines are mostly, but not exclusively unsecured loans. They are extended to an individual, based on their prior history with taking on and repaying debts, credit score, and their current income. If you want a higher-than-average credit line limit, keep in mind that your annual income must support the limit that you are asking for. Alternatively, you can also apply for a secured personal loan, provided that you have fixed deposits or any other kind of valuable property to use as a backstop. Secured credit lines are approved much faster and they do not affect your credit score just for being approved for the loan.
Home Equity Line of Credit (HELOC)
A home equity credit line or HELOC is a secured loan where the applicant puts his/her home as a collateral. The average credit line limit for a HELOC will be equal to roughly 75% – 85% of the lien property’s market value if it’s fully paid for. If the owner is still in the process of paying their house loan back, the maximum limit for their credit line will be decided after subtracting the money they still owe the bank, from the property’s estimated market value. The maximum allowed limit will be drawn based on 75% – 85% of that number and not the property’s total market value.
Although home equity lines of credit are revolving loans, some lenders will put an expiry date on it. This is to say that a HELOC may turn into a debt or a short-term loan after ten years, if you still owe them money at that point of course. If no money is owed to the lender at that time, they will close the line of credit. In most instances though, the homeowner will be offered a new line of credit if no balance is due, and they have maintained a good financial relationship with the lender.
Business Credit Line
Originally, the line of credit was exclusively reserved as a revolving business loan because the credit line format is best suited for trade. There is not much that separates how the average small business line of credit works, as compared an average personal credit line, except the scale. Businesses are naturally approved for a much higher, average credit line limit but it is not uncommon for companies to frequently reach the limit of their credit lines, only to pay it all back in full by the next few billing cycles.
If approved, even the average credit line limit for an unsecured business credit line will be a lot higher than the upper limit of a personal credit line. Now, a lot of that depends on who that individual is of course, but there is a usually a significant difference in scale between business lines of credit and personal credit lines. How much the company will be allowed to lend through a line of credit and how much interest their lender will charge for those loans is highly variable.
Just like how it is with personal credit lines, business credit lines are also decided based on factors such as the company’s previous history with lenders, their revenue, profits, etc. Business credit lines can also be extended based on liens, in which case the line of credit will become a secured loan.