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What is a Bank Line of Credit?

B. Miller
B. Miller

A bank line of credit is a type of loan that is issued by a bank. Most lines of credit are issued by banks and credit card companies, though auto dealers and some other businesses will sometimes offer a line of credit to consumers as well. A bank line of credit can include all different types of loans; this may be a mortgage, a credit card, or a student, personal, or business loan, just to name a few.

Often, a bank line of credit differs from a more traditional loan in that the borrower is not required to take any specific portion of the loan. This idea is best illustrated with an example. In a traditional loan of $1,000 US Dollars (USD), for example, the borrower will be given a check for $1,000 USD, and repayment of that money will then generally begin within a month or two. In a line of credit for $1,000 USD, however, the borrower has the option to use all or none of that money, and must only repay what he or she uses. The line of credit may be open for months or years, giving the borrower the option to access the cash if necessary.

Woman holding a book
Woman holding a book

A bank line of credit is often a revolving line of credit, similar to a credit card. This means that the same amount may be used and paid off again and again, up to the limit of the line of credit. Using the $1,000 USD example above, one might borrow $500 USD from the line of credit, repay it, then borrow $300 USD, and repay it again, and so on. A home equity line of credit is one of the most common lines of credit issued by a bank, and it functions exactly like this example.

New or existing businesses often use a bank line of credit as well. This allows the business to have a bit of a cushion in case of emergency; in addition, some businesses will use the bank line of credit in order to make payroll, and ensure they can pay their employees on time. Student loans are often more traditional loans, but along with personal loans, they may be considered to be a line of credit as well. In addition, some larger banks offer credit cards to their customers. Getting a credit card through one's bank can often be a good way to get a better interest rate on the credit card.

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