A line of credit (LOC) is a predetermined borrowing limit beyond which the borrower cannot withdraw funds. This is a financial agreement between two parties—the borrower and the lender—that specifies the credit limit. The borrower can use the credit whenever they need it.
A credit card is a common example of this type of revolving debt. When the limit is reached, the debtor repays the amount and it can be used again. LOCs provide debtors with flexibility by allowing them to agree to a certain limit but only pay for the credit they use, which is not the case with other types of debt.
The disadvantages of this are high interest rates, strict penalties in the event of default, and the possibility of overspending leading to inability to repay. Failure to make payments can also harm an individual’s credit score.