What is a 'line of credit'?

What is a 'line of credit'?

• A. A traditional loan with fixed terms and payments
• B. A flexible loan option allowing withdrawal up to a specified limit
• C. A secure loan backed by collateral
• D. A type of short-term loan with high interest rates

Answer: (B)

A line of credit is a financial arrangement that provides a borrower with access to a specified amount of funds, from which they can withdraw as needed. It offers flexibility, as the borrower can take out money up to the limit set by the lender, repay it, and then borrow again without having to reapply for a loan each time. This is particularly useful for individuals or businesses that have fluctuating cash flow needs or unexpected expenses. Interest is usually charged only on the amount withdrawn, rather than the entire credit limit, which makes it a cost-effective option for managing cash flow. This distinguishes it from a traditional loan, which typically involves a lump sum disbursement with fixed terms and payments, and a secured loan, which necessitates backing by collateral. A line of credit is also different from short-term loans that may have higher interest rates, as it may offer more favorable terms, especially if it is an unsecured line of credit. Overall, the flexibility and convenience provided by a line of credit make it an attractive financial tool for many individuals and businesses.

A line of credit is a financial arrangement that provides a borrower with access to a specified amount of funds, from which they can withdraw as needed. It offers flexibility, as the borrower can take out money up to the limit set by the lender, repay it, and then borrow again without having to reapply for a loan each time. This is particularly useful for individuals or businesses that have fluctuating cash flow needs or unexpected expenses. Interest is usually charged only on the amount withdrawn, rather than the entire credit limit, which makes it a cost-effective option for managing cash flow.

This distinguishes it from a traditional loan, which typically involves a lump sum disbursement with fixed terms and payments, and a secured loan, which necessitates backing by collateral. A line of credit is also different from short-term loans that may have higher interest rates, as it may offer more favorable terms, especially if it is an unsecured line of credit. Overall, the flexibility and convenience provided by a line of credit make it an attractive financial tool for many individuals and businesses.