A line of credit corresponds to the federal term "open-end credit," which the Truth in Lending Act (Regulation Z) defines as "consumer credit extended by a creditor under a plan in which: (i) The creditor reasonably contemplates repeated transactions; (ii) The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and (iii) The amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid."
A line of credit is a form of revolving credit that gives you access to funds up to an approved limit. You can withdraw, repay, and withdraw again during the draw period, and interest is generally charged only on the outstanding balance rather than the full limit. Lines of credit can be unsecured, such as a personal line of credit or a credit card, or secured, such as a home equity line of credit (HELOC) backed by real estate. Because the balance and payments can change as you draw and repay, a line of credit has no fixed number of payments and no single payoff date. This contrasts with an installment loan, which provides one amount up front and a defined repayment schedule.
A line of credit starts with an approved limit. The borrower draws what is needed, when it is needed, and pays interest on the amount drawn rather than on the whole limit. The payment due is usually a minimum based on the current balance, so the amount due changes as the balance rises and falls.
Some lines have a draw period followed by a repayment period in which no new draws are allowed; others stay open as long as the account is in good standing. Charges can apply for opening, keeping or drawing on the line, and the account terms disclose them, along with how the rate is set and whether it can change.
Home equity lines of credit are a secured version: the borrower's home backs the line, which usually allows a larger limit but puts the home at stake if payments stop. Personal lines of credit are typically unsecured and smaller. In both cases the lender can generally reduce or freeze the available credit under conditions described in the account agreement.
An example
A self-employed contractor opens a personal line of credit to smooth out uneven income. In a slow stretch, the contractor draws part of the limit to cover bills, then repays it when a large job pays out. The available credit shrinks with each draw and grows back with each repayment, and interest is charged only on the amount outstanding at the time.
Common misconceptions
Myth: Interest is charged on the full credit limit.
In fact: Interest generally applies only to the amount drawn and still owed, not to the unused part of the limit.
Myth: A line of credit has a fixed payoff date like a loan.
In fact: Most lines have no fixed payoff date while they are open. Payments follow the balance, which is why the total cost is harder to predict than on an installment loan.
Myth: An unused line of credit costs nothing.
In fact: Some lines carry charges for keeping the account open even with no balance. The account terms say whether any apply.
What to check
- How the minimum payment is calculated and whether it covers principal.
- Whether the rate is fixed or variable, and what can change it.
- Whether there is a draw period and what happens when it ends.
- Any charges for opening, keeping or drawing on the line.
How this applies at Desert Rock Capital
A Desert Rock Capital loan works differently from a line of credit. If you are approved, you receive one amount from $100 to $3,000 and repay it in fixed biweekly payments over a set schedule, with no balloon payment. The amount and every payment are in writing before you sign, and when the balance reaches zero the loan is paid off.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.