A line of credit (LOC) is a set borrowing limit after which the borrower can’t take money. This is a financial agreement between two parties—the borrower and lender, which states the limit of the credit. The credit can be used whenever needed by the borrower.
A common example of this is a credit card, which is known as revolving debt. Once the limit is reached, the amount is repaid by the debtor and can be used again. LOC offers flexibility, which gives debtors control over their debts, as debtors can agree to a certain limit but only pay for the credit they use, which is not the case in other debts.
However, the disadvantages of this are high interests, strict penalties in case of default, and a possibility of overspending leading to the inability of repaying. Falling back on the payments can also hurt the individual’s credit score.
