A line of credit is a flexible borrowing arrangement. A lender gives you a limit, you borrow what you need up to that limit, and you pay interest only on the amount you've used. When you repay, that money becomes available again.
That reusable part is what sets it apart from a loan, where you receive one lump sum and repay it on a fixed schedule. A line of credit can be handy for uneven expenses, but it needs discipline because it's easy to keep borrowing.
How a line of credit works
- You're approved for a limit. The lender sets the most you can borrow after looking at your finances.
- You draw money when you need it. Depending on the product, you might transfer funds to your bank account, write a cheque or use a card.
- Interest builds on the amount you've drawn. If you've borrowed nothing, you generally pay no interest, though some products have other charges, so read the terms.
- You repay. Most lenders ask for at least a minimum payment on a regular schedule. You can usually pay more.
- You can reuse the credit. Money you repay becomes available again, as long as the line stays open and you're within the draw period.
Interest on many lines of credit is variable, which means the rate can change over time. That makes your payments harder to predict than with a fixed-rate loan.
Types of line of credit
Personal line of credit
An unsecured line for everyday needs such as home repairs, medical bills or smoothing out irregular income. It's usually approved on your credit history and income.
Home equity line of credit
Often called a HELOC in the US. It lets you borrow against the equity in your home, which is the part of its value you own outright. It usually has a draw period, when you can borrow, followed by a repayment period. Your home is the security, so missing payments puts it at risk.
Business line of credit
A flexible source of working capital for a company, for example to cover a late-paying customer, buy stock or manage seasonal swings. Lenders look at trading history and cash flow, and may ask for a personal guarantee from the owner.
Secured vs unsecured
A secured line is backed by something you own, such as a property or savings. That risk to the lender is lower, so terms can be better. An unsecured line has no collateral, so approval depends more on your credit record and income.
Overdraft lines
In the UK, an arranged overdraft is a form of credit line attached to your current account. In the US, some banks offer overdraft protection that links to a line of credit. Unarranged overdrafts can be expensive, so check your bank's terms before you rely on one.
Line of credit vs personal loan vs credit card
| Feature | Line of credit | Personal loan | Credit card |
|---|---|---|---|
| How you receive money | As you need it, up to a limit | One lump sum up front | As you spend, up to a limit |
| Repayment | Flexible, minimum payments | Fixed payments on a schedule | Minimum payment, or pay in full |
| Interest | On what you've drawn, often variable | On the full amount, often fixed | On unpaid balances, usually after any interest-free period |
| Reusable | Yes, within the draw period | No, once repaid it's finished | Yes |
| Best for | Uneven or uncertain expenses | One-off, planned costs | Everyday spending and short-term borrowing |
The table shows the pattern. A personal loan is for a known amount, a card is for everyday spending, and a line of credit sits in the middle as a flexible reserve. None of them is better in every case. The right one depends on what you're paying for, how sure you are of the amount, and how confident you are that you'll repay it.
When it makes sense and when it doesn't
It can make sense when your expenses are uneven, when you want a safety net for emergencies, or when a business has gaps between paying suppliers and being paid by customers. It can also suit a project where you'll pay bills in stages, such as a renovation.
It makes less sense if you'd treat it as extra income, if you struggle to stop borrowing, or if you know the exact amount you need once. A personal loan with a clear end date can be easier to manage in that case. Be careful with a secured line, because you could lose what backs it.
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What lenders look at
Approval isn't automatic. The lender wants to know that you can repay, and that you've repaid other borrowing in the past. Here's what usually comes into the decision.
- Your credit history and credit score, including any missed payments.
- Your income and how steady it is.
- Your existing debts compared with your income.
- For secured lines, the value of what backs the borrowing, such as the equity in a home.
- For business lines, how long the company has traded and how much cash comes in.
- Your employment or business history.
Using a line of credit also leaves a trail on your credit report. Applying can leave a mark, and a high balance compared with your limit can look worrying to the next lender. Keeping usage modest and paying on time is the habit that helps most.
Questions to ask a lender
Before you sign, ask the lender to explain the answers to these in plain English. If the explanation isn't clear, that's a good reason to walk away or to speak to an independent adviser.
- Is the interest rate fixed or variable, and what can make it change?
- Are there charges to open the line, keep it open, or for unused credit?
- How long is the draw period, and what happens when it ends?
- What's the minimum payment, and how does it work?
- Can you reduce or freeze my limit, and when?
- Is it secured, and what happens if I miss payments?
- How will it show on my credit report?
- What happens if I want to close the line early?
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This is general information, not financial advice. Check the details with a qualified, regulated professional before you decide anything.
Frequently asked questions
Is a line of credit the same as a credit card?
They're similar, because both let you borrow up to a limit and reuse it as you repay. They differ in how you access the money, how interest is charged and what the terms look like. Read the details of each product.
Do you pay interest on a line of credit if you don't use it?
Generally you pay interest only on what you've drawn. Some lenders add other charges, such as an annual or maintenance charge, so check the terms.
What is a line of credit used for?
People use them for uneven expenses, home projects, emergencies and, in business, working capital. They work best for short-term, flexible needs that you can repay.
Can a lender change or cancel my line of credit?
Often yes. Lenders can reduce limits or close lines under the terms of the agreement, which is why a line shouldn't be your only safety net. Read what your agreement says.
