What is a line of credit?

A line of credit (LOC) or credit line is an arrangement between a financial institution, usually a bank, and a customer, that fixed the maximum amount of a loan that the customer can borrow. The borrower can avail maximum fund from the line of credit according to agreement.

For example, a company arrange an agreement with its bank to borrow money as needed but never owe the bank in excess of $ 3 million. Interest will be calculated by multiplying the prime rate times the loan balance as specify in the loan agreement.

In the U.S. many individuals have a home equity line of credit that allows them to borrow up to the amount of “the line.”