Lines of credit

Lines of credit or LOCs are sometimes confused with traditional loans. But they offer a way to cover large expenses when other loan options may not work. They give you access to funds quickly and flexibly. A credit card is also a line of credit. 

With a line of credit, you can withdraw only what you need, when you need it. This differs from mortgages and personal loans, when you would receive the full amount of the loan upfront, repaying it through fixed monthly payments. 

Common uses for lines of credit include:

• Emergencies
• Long-term projects
• Education expenses 
• Debt consolidation
• Cash flow management (when you need money to cover a gap in income or an unexpected cost)

Types of LOCs

Lines of credit come in both secured and unsecured varieties. A secured line of credit is backed by collateral, such as a home or other property. That collateral is at risk if payments on the loan are not maintained.

As Debt.org explains, there also are revolving and non-revolving lines of credit. Revolving lines of credit, such as credit cards, require the borrower to pay at least a minimum amount of the total owed each month. Non-revolving lines of credit provide a fixed amount of money for a specific period or purpose. The loan may require periodic payments or payment of the entire principal at the end of the loan term.

Credit cards and personal lines of credit are most common, but there are a few other types as well. For example, a home equity line of credit is a loan secured by the equity or value in a house. These types of credit are often used for renovation projects, in which the work adds to the value of the property used to secure it. 

Business owners may also use lines of credit to finance recurring purchases or expenses. This can continue if certain conditions are met, and repayments are kept up. In contrast, traditional loans provide a single lump sum.