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?
A credit tool is offered as a credit tool offered to governments , companies or individuals by banks or financial consortia, which stipulates in advance a total amount that is made available to the applicant, usually in a bank account or some financial instrument, where you can have funds until you reach the ceiling.
The credit line has the virtue that interest is paid only for the amount withdrawn and not for the total loan agreed.
Often these types of financial tools require a collateral: an asset that serves as a guarantee for the payment of money and that serves as a guarantee to access credit. This is because, together with the borrowed capital , the applicant must return stipulated interest and commissions, and all in a certain period of time and with a certain periodicity.
In common banking, credit lines are known as credit accounts and often operate as a credit backup to checking or checking accounts . Thus, if the account holder issues 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 credit line. credit, which must then be paid to the bank according to specific conditions; a little to the way of using credit cards.
Differences between credit line and loan
While loans and lines of credit are forms of liabilities , that is, forms of money lending, there are important differences between the two concepts, such as the following:
- Delivery of money . In most of the loans the applicant is given a certain amount or requested at the same time of his request, under the commitment of payment of the requested amount plus interest and commissions, according to a term and a periodicity of payment. On the credit line, 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is lent as much as he wishes (below the limit, obviously) and interest and commissions are charged only for the amount withdrawn, not for the total amount paid. .
- Money back . As in the previous point, loans are paid in full at the time of maturity, unless there has been a previous amortization; while the credit lines charge the requested balance at the time of its expiration, which may be much lower than the maximum limit set.
- Interest rate . The amount charged for interest on a loan is always lower than the one set for credit lines. In addition, in many lines of credit, a service commission must be paid for the amount not yet requested, to guarantee its availability.
- Renewal . Credit lines can be renewed as many times as desired, provided that the credit issuer guarantees it; While the loans cannot be extended or renewed: they must be paid at the end of the fixed term, in any case being able to be paid with money from a new loan that would come to replace it.