A line of credit (LOC) is a credit facility offered by financial institutions. In this arrangement, you have an account with a determined credit limit. You can borrow money, repay, and continue borrowing as long as it is within this limit. It’s an excellent option for those who need continued access to funds to pursue different goals, whether for business, home improvement projects, or other purposes.

Before opening a LOC, you’ll first need to know about the various types. That way, you can choose the one that best fits your needs and circumstances. Here’s what you need to know about the different kinds of LOC:

Personal Line of Credit

This type of LOC gives you access to unsecured funds that you can borrow and repay multiple times. However, to open a personal line of credit, you’ll need to demonstrate a credit history of no defaults, a credit score of 670 or higher, and proof of steady income. Showing that you have savings and stocks that could be used as collateral may also help you get approved, though collateral is not mandatory for a personal line of credit.

A personal LOC is often used for emergencies, travel, entertainment, weddings, other important events and to help supplement those who do not have a regular income.

Home Equity Line of Credit (HELOC)

A HELOC is a secured LOC that uses the home’s market value subtracted by the amount owed, which then serves as the foundation for establishing the line of credit’s size. Usually, the credit limit is 75 or 80 percent of the home’s market value, not accounting for the balance owed on the mortgage.

HELOCs are available with a draw period, typically ten years. During this period, the borrower can access these funds, repay, and borrow until the time has elapsed. The balance is due once the draw period has finished, but the borrower can extend the loan to repay the balance over a set time. HELOCs usually have closing costs, which is another factor to consider.

Securities-Backed Line of Credit (SBLOC)

This LOC is a special secured-demand kind, where the borrower’s securities serve as the collateral. An investor can borrow anywhere from 50 to 95 percent of the assets’ value in their account in an SBLOC. Additionally, SBLOCs are non-purpose loans, which means that the borrower cannot use the money to purchase or trade securities, but they can use it for other expenses.

Under an SBLOC, the borrower must pay interest-only payments every month until the loan is completely repaid or the brokerage or bank demands payment. This can occur if the value of the investor’s portfolio dips below the level of the LOC.

Demand Line of Credit

This type of LOC is rarely used and can be secured or unsecured. Under a demand LOC, the lender can request the amount borrowed to be paid at any time. Repaying the loan until the lender calls the loan can consist of only the interest or the interest and the principal, all of which depend on the LOC’s terms. The borrower can also max out the credit limit any time they wish.

Business Line of Credit

A business LOC allows organizations to borrow funds only as needed instead of applying for a fixed loan. The financial institution offering the LOC assesses the business’s market value, profitability, and risk before establishing the limit. The LOC can be secured or unsecured, although this entirely depends on the business’s LOC request and the evaluation results.

Conclusion

LOCs provide a world of benefits to both organizations and individuals. Still, it’s essential to be aware of its limitations and understand the risks you’re taking on by pursuing this flexible loan. By using our guide, you’ll be familiar with the various types of LOCs and understand which one fits your needs best.

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