A revocable line of credit is a source of credit made available to a person or business by a bank or financial institution, which may be revoked or cancelled at the lender`s discretion or in certain circumstances. A bank or financial institution may revoke a line of credit if the customer`s financial situation deteriorates significantly or if market conditions are so unfavourable that a revocation is warranted, as was the case after the 2008 global credit crisis. A revocable line of credit can be guaranteed or secured, the former being usually at a higher interest rate than the latter. A line of credit (LOC) is a default credit limit that can be used at any time. The borrower can withdraw as needed until the limit is reached and, since the money is repaid, it can be re-borrowed in the case of an open line of credit. A line of credit has built-in flexibility, which is its main advantage. Borrowers can claim a certain amount, but they don`t need to use everything. On the contrary, they can tailor their LOC expenditures to their needs and owe interest only on the amount they derive and not on the entire line of credit. In addition, borrowers can adjust their repayment amounts based on their budget or cash flow as needed. For example, you can pay off the entire balance at once or simply pay the minimum monthly payments. A credit card is implicitly a line of credit that you can use to make purchases with funds you don`t currently have on hand. HELOC are the most common type of secure LOCs. A HELOC is covered by the market value of the house, decreased by the amount owed, which becomes the basis for determining the extent of the line of credit.
Generally, the credit limit is 75% or 80% of the market value of the home, minus the balance owed on the mortgage. An LOC is an agreement between a financial institution – usually a bank – and a customer that determines the maximum amount of credit the customer can borrow. The borrower can access credit from the line of credit at any time, provided they do not exceed the limit (or credit limit) set in the agreement and meet all other requirements, such as timely minimum payments.B. It can be offered as an establishment. This type may be secure or unsecured, but it is rarely used. With an LOC application, the lender can claim the amount borrowed at any time. Amortization (until the loan is called) can only be paid or interest-free under the terms of the LOC. The borrower can issue up to the credit limit at any time. Businesses use it to borrow as needed, rather than borrowing on a fixed basis.
The financial institution that expands LOC assesses the market value, profitability and risk taken by the company and extends a line of credit based on this valuation. The LOC may be unsecured or secure depending on the size of the credit line requested and the evaluation results.