Personal lines of credit

Definition

A personal line of credit is a flexible loan from a financial institution that allows you to borrow up to a predetermined limit. It is typically used for short-term funding needs and can be accessed as revolving credit or a fixed term.

5 Must Know Facts For Your Next Test

1. Personal lines of credit typically have variable interest rates which can change over time.
2. Unlike traditional loans, you only pay interest on the amount you withdraw, not the total credit limit.
3. They can be either secured (backed by collateral) or unsecured (not backed by collateral).
4. The repayment structure varies but often includes minimum monthly payments based on the outstanding balance.
5. Loan amortization schedules for personal lines of credit help in calculating equal multiple payments over time.

Review Questions

• What type of interest rate is usually associated with personal lines of credit?
• How does the repayment process differ between a personal line of credit and a traditional loan?
• What role does collateral play in securing a personal line of credit?

Related terms

Revolving Credit: A type of credit that does not have a fixed number of payments, such as credit cards.

Secured Loan: A loan backed by collateral to reduce the risk associated with lending.

Amortization Schedule: A table detailing each periodic payment on an amortizing loan, showing amounts applied to principal and interest.