Lines of Credit (LOC) and How They Work

Lines of credit and loans are two different finance methods. Both are banking products that allow capital to the purchaser but differ in definition and objectives. Loans provide all the money at once, and the person that takes out the loan usually spends the money right away. On the other hand line of credit means that a bank or a landing platform gives you access to a set sum of money that you can use at any time for a certain period. 

Due to the rise of financial technologies, you can take out a loan or a line of credit through an online lending platform such as Fundbox. If you don’t know what is Fundbox, it is time to do your research and get more familiar with online lenders. 

This article will focus on giving you more information on lines of credit. So, without further ado, let’s start. 

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lines of credit or loc and how they work

Line of Credit or LOC, the meaning and way of work!

The line of credit-LOC is a current borrowing limit that can be accessed anytime. The purchaser can withdraw money until the limit is reached. When the money is repaid, it can be purchased again as an open line of credit.

LOC is an agreement between a financial institution such as a bank or an online lender that establishes the maximum amount the customer can borrow. The borrower has access to the LOC at all times as long as the maximum amount (or credit limit) set in the agreement has not been reached.

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All LOCs consist of a set amount of money that can be borrowed as needed, paid back and borrowed again. The amount of interest, size of payments, and other rules are set by the lender. 

Some LOCs allow you to write checks (drafts), while others include a type of credit or debit card.

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Variety of Lines of Credit

1. Personal Line of Credit

This line of credit gives access to unsecured funds that can be purchased, repaid, and purchased again. Opening a distinctive LOC needs a credit history of no payments, a credit score of 670 or higher, and a good income. Also, having savings is a plus, as does collateral in the form of stocks or certificates of deposit, although collateral is not needed for a personal LOC. Personal LOCs are for short terms use. You can take out this type of LOC for a  wedding and other important occasions, overdraft protection, travel, and even entertainment, as well as to help smooth out cracks for the ones with irregular income.

2. Home Equity Line of Credit (HELOC)

HELOCs are the most secured type of LOC. A HELOC is secured by the value of the home market minus the amount owned and becomes the point for determining the size of the LOC. Usually, the credit limit is between 75% or 80% of the value of the home market, without the balance owed on the mortgage.

HELOCs frequently come with a draw period (usually ten years) during which the purchaser can access obtainable funds, repay them, and purchases them again. HELOCs usually have closing costs, including the cost of an assessment on the property used as collateral.

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3. Business Line of Credit

Businesses use these as loans on an as-needed basis rather than committing to a fixed loan. The financial institution expanding the LOC calculates the value of the market, profitability, and risk taken on by the business and gives out a LOC based on that calculation. Depending on the size of the LOC wanted and the calculation results, the LOC may be unsecured or secured. As with nearly all LOCs, the interest rate is variable.

4. Demand Line of Credit

With an order LOC, the lender can call the amount purchased due at any time. Reparation which is until the loan is called can be interest only or plus principal, depending on the terms. The purchaser can spend up to the credit limit at any time.

5. Securities-Backed Line of Credit (SBLOC)

It is a special secured-demand LOC, in which collateral is provided by the purchaser securities. More often, an SBLOC lets the investor purchase from 50% to 95% of the value of assets in their account. SBLOCs are non-purpose loans, meaning that the purchaser may not use the money to buy or trade securities. Almost any other type of spending is allowed.

SBLOCs require the purchaser to make monthly, interest-only payments until the loan is repaid in full or when the brokerage or bank demands payment.

Final word

This article was just an introduction to what LOCs are and the different types of banks and online lending platforms offer. If you seriously consider making out a LOC, you should do additional research to ensure you make an informed decision. 

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