We explain what a line of credit is and some of its characteristics. Also, its difference with a loan.
What is a line of credit?
It is known as a line of credit a credit tool offered to governments, companies or individuals by banks or financial consortia, in which a total amount is stipulated in advance that is made available to the applicant, generally in a bank account or some financial instrument, from which funds may be available until reaching the top
The line of credit has the virtue that interest is paid only on the amount withdrawn and not on the total loan agreed upon.
Often these types of financial tools require collateral: an asset that serves as a guarantee for the payment of the money and that acts as a guarantee to access credit. This is because along with the borrowed capital, the applicant must return stipulated interest and commissions, and all within a certain period of time and with a certain frequency.
In common banking, lines of credit are known as credit accounts and often operate as a credit support for current or checkbook accounts. In this way, if the account holder issues a check or makes a payment and their balance is not enough to cover the requested amount, the check is not returned or the transaction is rejected, but rather it is covered with money from the credit line. credit, which must then be paid to the bank according to specific conditions; a bit like the way credit cards are used.
See also: Bank credit
Differences between line of credit and loan
Although loans and lines of credit are forms of liabilities, that is, forms of borrowing money, there are important differences between both concepts, such as the following:
- Delivery of money In most loans, the applicant is given a determined or requested amount at the time of application, under the commitment to pay the requested amount plus interest and commissions, according to a deadline and a payment periodicity. In the line of credit, on the other hand, a maximum limit of money is established and the applicant is lent as much as they want (below the limit, obviously) and interest and commissions are charged only for the amount withdrawn, not for the total amount established. .
- Money back As in the previous point, loans are collected in full at the time of maturity, unless there has previously been an amortization; while lines of credit charge the requested balance at the time of maturity, which may be much lower than the established maximum limit.
- Interest rate The amount charged for interest on a loan is always lower than that established for lines of credit. In addition, in many lines of credit a service fee must be paid 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 entity issuing the credit guarantees it; while loans cannot be extended or renewed: they must be paid at the end of the set term, in any case being able to be paid with money from a new loan that would replace it.
