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A line of credit is a revolving loan that borrowers can draw on at any time, with variable interest rates tied to indices such as the US Prime Rate or LIBOR. Borrowers should consider factors such as interest rate, set-up fees, and term, and review the terms of the contract to see what access options are available.
A line of credit is a loan that takes the form of a revolving line of credit. Those considering establishing a line of credit should consider several factors, such as interest rate, set-up fees, and term. Lenders offer these facilities to both consumers and businesses. Some facilities are stand-alone products, such as credit cards, while overdraft facilities and other types of accounts are linked to deposit products and are designed to prevent overdraft situations.
Borrowers can draw on a revolving line of credit at any time and these accounts typically have variable interest rates that are tied to indices such as the US Prime Rate or the London Interbank Offered Rate (LIBOR). Since rates are subject to change, potential borrowers should focus on the spread between the index and the interest rate of the line of credit. Also, some lenders issue lines of credit that have low introductory rates, so borrowers must determine the long-term rate range rather than make a decision based on the introductory rate. In some cases, the spread changes annually, in which case the borrower may benefit from choosing a line of credit that has a fixed spread over the life of the loan.
Some banks charge account set-up fees on lines of credit. Borrowers must pay these fees in addition to government release fees and documentary taxes assessed in many regions. In many cases, borrowers can lock in a lower interest rate by agreeing to pay an account set-up fee or annual account fee. Borrowers calculate the full cost of each line of credit option when choosing between low-rate loans with fees and high-rate loans without fees.
In many cases, banks allow borrowers to establish open lines of credit that do not have a predetermined time frame. Other lenders offer credit facilities that are renewable annually. Before choosing between a term line of credit and an open-ended line of credit, the borrower should carefully review the terms of the entire agreement. In some cases, open-ended line of credit contracts include clauses that allow the lender to terminate the line at any time. Therefore, a borrower should not assume that an open line will remain active longer than a limited-term line of credit.
Credit facilities can be accessed with checks, access cards, online transfers or through bank withdrawals. A borrower should review the terms of the contract to see what access options are available with each credit product. A borrower who lives near a bank may have little trouble making withdrawals within the bank, while someone in a remote location may need a line of credit that can be accessed online or with an access card.
Smart Asset.
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