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What is line of credit in 2 minutes

Welcome to professrsavings.com, we teach finance basics.

Today we will teach you line of credit and when and why you will need it in about two minutes.

Whether you’re a business owner or an individual, you may need money for various reasons such as expanding your business and this takes additional capital.

A line of credit is an arrangement a bank offers a maximum loan amount that the borrower can use anytime.

Pretty powerful.

The borrower which can be an individual or business can take out as much as they want up to the maximum amount. 

Lines of credit have a couple of important advantages so let me explain.

First to note, borrowers are only charged interest on the funds they actually draw and this is how it is different from traditional loans.

Let’s take Professor Savings wants to expand cupcake business and has regular income from month to month. 

He applies at the bank for a personal line of credit worth $15,000 just in case he runs low on cash. After all, he may need some extra cash to buy new ovens.

After his banker checks Professor Savings banks records, he is given the line of credit.

Remember, Professor Savings takes $15,000 from his credit line, he’s only charged interest on that withdrawal amount. 

A credit card is an example of an unsecured line of credit. 

Additional note.

A home equity line of credit is a bit different since the secured line of credit is when the bank places a lien on your property. Lien simply form of security over an item to secure the payment of a debt.

This way, the lender takes on less risk because of the lien. 

Even if you have a an established line of credit, make sure you first figure out how much you need to make or in this case how much cupcakes Professor Savings needs to sell.

Professor Savings signing out. Make sure you subscribe to our channel so you can learn more about finance basics.

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