Definition of Line of Credit Loan

Borrowing money forces you to take on a degree of risk since you'll be legally obligated to repay the loan, with interest. Borrowing can be a responsible decision when you spend the money you receive wisely and make a plan to repay it in advance. Lines of credit are just one of the options borrowers face and carry certain terms that set them apart from other loans.

General Definition

A line of credit allows you to borrow in multiple instances up to a set limit, known as your credit limit. Most come with a card that you use when you shop and automatically charge to your account, reducing its remaining available credit and increasing the balance that you must repay. Most line of credit loans are revolving credit, which means that as you pay down your balance you can borrow again up to the credit limit.

Types

There are several types of line of credit loans. One of the most common is a credit card, including store credit cards, which is a line of credit from the issuer based on your credit history, income and other financial indicators. Another common type of line of credit is a home equity line of credit, or HELOC, which is a form of second mortgage. Unlike a home equity loan, which is a one-time payment, a home equity line of credit uses the portion of your home that you own from paying off that part of your first mortgage as collateral for a line of credit to which you can charge purchases. You'll repay a home equity line of credit alongside the first mortgage.

Terms

Most line of credit loans feature variable interest rates. This means that the interest rate you pay can change on a regular basis, as defined in the loan agreement. Lenders use data from the economy, known as an index, to determine interest rate changes. Even credit cards with fixed interest rates are subject to interest rate changes when the credit card company gives you adequate notice of the change. Line of credit loans also have late fees for missed or late payments, as well as overbalance fees if you run up a balance in excess of your credit limit.

Uses

You may be able to use a line of credit for specific purposes outlined in the loan agreement, or in some cases, for any purpose you wish. Store credit cards give you a line of credit that you can only use at that store or other stores owned by the same parent company. A home equity line of credit is access to credit that you can use for any purpose, though major life expenses such as college tuition, home improvements and unexpected medical bills are among the most popular ways to use the credit in a home equity line. Using a line of credit to make unnecessary purchases can be dangerous as the variable interest rates mean you'll pay more in the end and might run up bills you can't afford.