UNDERSTANDING
Lines of Credit
By Dr. Teresa R. Martin, Esq.
loans. A line of credit is
similar to a credit card,
but with better interest
rates.
T
here are many different ways
to borrow money. You can go
to a bank for various types
of loans. You may choose to use
pawnshops or payday loans. Credit
cards are another idea. You can
even borrow money from friends or
family.
Figure out if a line
of credit might be
the perfect source
of funds for you:
1. A line of credit is
a flexible loan from a
financial institution. A
line of credit has a limit,
just like a credit card.
You can use the avail-
able balance as needed.
Another option is a line of credit.
While lines of credit have been pop-
ular with businesses, they haven’t
been widely used by individuals.
This is primarily because banks
aren’t advertising them, and most
borrowers lack the knowledge to
inquire.
• Interest is charged as soon as the
money is borrowed. The borrower can
repay immediately or according to a
predetermined schedule.
This is unfortunate, because a line
of credit has many unique features
that set it apart from other types of
• These loans tend to have a lower
risk for banks, so they like to pro-
vide lines of credit. The default rate
is much higher for credit cards. But,
it’s important to qualify because it’s
an unsecured loan.
2. There are many times that a
line of credit can be useful. Banks
prefer to refrain from making one-
time personal loans, especially those
that are unsecured. It’s pointless
for a borrower to take out several
short-term loans over the course
of a year. A line of credit bypasses
these issues by making the money
available as needed.
• Lines of credit aren’t normal-
ly used to make large purchases.
They’re mostly used to even out the
variability of monthly income and
expenses.
• While a credit card can perform
the same function, a line of credit
is usually less expensive to use.
The interest rates are significantly
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