Credit Line

Credit

Quick Definition

A Credit Line (Line of Credit) is a pre-approved borrowing limit that allows a borrower to withdraw funds as needed up to a certain amount.

Detailed Explanation

A Credit Line is a flexible financing option where you don't receive the full loan amount upfront. Instead, you can borrow, repay, and reuse funds within the approved limit.

Interest is charged only on the amount used, not the total limit. It is commonly used by businesses for working capital needs and by individuals for emergency funds.

In India, credit facilities are regulated by the Reserve Bank of India.

Key Features of Credit Line

  • Pre-approved borrowing limit
  • Flexible withdrawals
  • Interest only on utilized amount
  • Revolving facility (reuse after repayment)

Types of Credit Line

  • Personal Line of Credit
  • Business Line of Credit
  • Home Equity Line of Credit (HELOC)

Credit Line vs Loan

[Image comparing a line of credit vs a traditional term loan highlighting disbursement and interest charging differences]
  • Credit Line: Flexible, use as needed
  • Loan: Lump sum disbursed at once

Benefits

  • Better cash flow management
  • Quick access to funds
  • Useful for emergencies

Example

"A business has a ₹5 lakh credit line but uses only ₹2 lakh. Interest is charged only on ₹2 lakh, and repaid funds can be reused."

← Back to Financial Dictionary