How do payments on a line of credit work

With a line of credit, you get to spread out your usage over days, months or even years. For example, say you need some extra money to make some home repairs. You almost always have to start repaying that immediately. You can borrow whenever you need, say for a new roof one month and then a new kitchen the next.

This can help you borrow in smaller amounts which makes it much easier to pay back. Just like credit cards, lines of credit also carry interest rates. Your credit report will determine the rate and the amount of the credit line.

This rate determines how much your debt grows over time. Develop and improve products. List of Partners vendors. A line of credit LOC is a form of a flexible, direct loan between a financial institution —usually a bank—and an individual or business. Like credit cards , lines of credit have predetermined borrowing limits, and the borrower can draw down on the account at any time, provided the limit is not exceeded.

Also, like credit cards, lines of credit tend to have relatively high interest rates and some annual fees, but interest is not charged unless there is an outstanding balance on the account. Lines of credit have the same features as revolving credit such as a credit card. A credit limit is established, and funds can be used for a variety of purposes. Interest is charged at regular intervals, and payments may be made at any time.

There is one major exception: The pool of available credit does not replenish after payments are made. Once you pay off the line of credit in full, the account is closed and cannot be used again. As an example: Personal lines of credit are sometimes offered by banks in the form of an overdraft protection plan. A banking customer can sign up to have an overdraft plan linked to his or her checking account. If the customer goes over the amount available in checking, the overdraft keeps them from bouncing a check or having a purchase denied.

Like any line of credit, an overdraft must be paid back, with interest. Most lines of credit are unsecured loans. This means the borrower doesn't 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 lines of credit are attractive because they provide a way to recoup the advanced funds in the event of non-payment. Unsecured lines of credit tend to come with higher interest rates than secured LOCs. They are also more difficult to obtain and often require a higher credit score.

Lenders attempt to compensate for the increased risk by limiting the number of funds that can be borrowed and by charging higher interest rates. One of the most popular ways to do this is with a line of credit. Like traditional loans, it has a limit amount, accrues interest, and requires timely payments.

Unlike conventional loans, you can draw parts of it instead of the full amount. Also, lines of credit only accrue interest on the amount drawn from it and have no fixed end date. Curious to know more? Lines of credit can be made available for both personal and business accounts. There are two categories for lines of credit: secured and unsecured.

Even then, a bank will rarely approve you for your full equity amount as they want to be protected in case something should happen. You agree we may use an auto-dialer to reach you. A home equity line of credit, also known as a HELOC, is a line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans Footnote 1 such as credit cards.

A HELOC often has a lower interest rate than some other common types of loans, and the interest may be tax deductible. Please consult your tax advisor regarding interest deductibility as tax rules may have changed. As you repay your outstanding balance, the amount of available credit is replenished — much like a credit card.

This means you can borrow against it again if you need to, and you can borrow as little or as much as you need throughout your draw period typically 10 years up to the credit limit you establish at closing. At the end of the draw period, the repayment period typically 20 years begins.

Footnote 2. To qualify for a HELOC, you need to have available equity in your home , meaning that the amount you owe on your home must be less than the value of your home.

Also, a lender generally looks at your credit score and history, employment history, monthly income and monthly debts, just as when you first got your mortgage. When you have a variable interest rate on your home equity line of credit, the rate can change from month to month. The variable rate is calculated from both an index and a margin. An index is a financial indicator used by banks to set rates on many consumer loan products. Most banks, including Bank of America, use the U.

The other component of a variable interest rate is a margin, which is added to the index. The margin is constant throughout the life of the line of credit. Payments may change based on your balance and interest rate fluctuations, and may also change if you make additional principal payments. Some lenders, including Bank of America, offer an option that allows you to convert a portion of the outstanding variable-rate balance on your HELOC to a fixed rate.

Payments you make on a balance at a fixed interest rate are predictable and stable and can protect you from rising interest rates. There may be up-front fees, such as an application fee, an annual fee and a cancellation or early closure fee. Ready to apply? Apply online now. Want more options?