A line of credit (LOC) is a preset borrowing limit offered by banks and financial institutions to their personal and business customers. Lines of credit can be used at any time until the limit is reached. The limit is set by the issuer based on the borrower’s creditworthiness. As money is repaid, it can be borrowed again in the case of an open line of credit. The borrower can access funds from the LOC at any time as long as they do not exceed the maximum amount (or credit limit) set in the agreement.

A line of credit is a credit product that banks and other financial institutions offer their customers. They are available for both personal customers and business clients. Like other credit products, customers must qualify to be approved for a line of credit. Customers may apply for or be pre-approved for a credit line. The limit on the LOC is based on the borrower’s creditworthiness.

All LOCs consist of a set amount of money that can be borrowed as needed, paid back, and borrowed again. The amount of interest, size of payments, and other rules are set by the lender. Some LOCs allow you to write checks, while others issue a debit card that can be used to access the available credit. A line of credit can be secured or unsecured. Secured LOCs come with lower rates as they are backed by collateral while unsecured LOCs typically come with higher rates.

The LOC is highly flexibility, which is its main advantage. Borrowers can request a certain amount, but they do not have to use it all. Rather, they can tailor their spending from the LOC to their needs and owe interest only on the amount that they draw, not on the entire credit line. In addition, borrowers can adjust their repayment amounts as needed based on their budget or cash flow. They can repay, for example, the entire outstanding balance all at once or just make the minimum monthly payments.

There are different types of LOCs that financial institutions offer. Some of the most common types of LOCs include personal, business, and home equity lines of credit (HELOCs). We explore these in more detail below.

Most LOCs are unsecured loans. This means that the borrower does not promise the lender any collateral to back the LOC. One notable exception is a home equity line of credit (HELOC), which is secured by the equity in the borrower’s home. From the lender’s perspective, secured LOCs are attractive because they provide a way to recoup the advanced funds in the event of nonpayment.1

For individuals or business owners, secured LOCs are attractive because they typically come with a higher maximum credit limit and significantly lower interest rates than unsecured LOCs. Unsecured LOCs are also more difficult to obtain and often require a higher credit score or credit rating.

Lenders attempt to compensate for the increased risk by limiting how much can be borrowed and by charging higher interest rates. That is one reason why the annual percentage rate (APR) on credit cards is so high.

Credit cards are technically unsecured LOCs, with the credit limit—how much you can charge on the card—representing its parameters. But you do not pledge any assets when you open the card. If you start missing payments, there’s nothing that the credit card issuer can seize in compensation.