Line of Credit Basics
A line of credit is a source of credit, or funding, extended to a borrower. Unlike a term loan that is paid down over the loan term, such as a 5-year loan to buy a car, you only have to apply once for a line of credit that you can continue to use and re-use, based on your credit needs. You are only charged interest on the amount you borrow.
A line of credit is, in many ways, similar to a credit card, as you are pre-approved for a maximum amount you can borrow. Once you make payments to reduce the balance owed, you can then borrow more on the line of credit, up to the pre-approved limit of the line of credit loan.
Definitions and Common Terms
Loan amount: The total dollar amount of your loan.
Interest rate: The annual interest rate, often called an annual percentage rate (APR) for this loan or line of credit.
Monthly payment: Monthly principal and interest payment (PI) for this loan or line of credit.
Term in months: Number of months for this loan or line of credit.
Payment options: Select the option that matches your payment type:
- Fixed loan term – Traditional amortization produces a fixed monthly payment. The monthly payment calculated will leave a zero balance at the end of the loan’s term.
- 2%, 1.5% or 1% of balance – Your minimum payment is calculated as a percentage of the outstanding principal balance. Your minimum payment will change each month, and if you only make the minimum payment your balance will not be zero at the end of your loan’s term.
- 100% interest owed – For lines of credit and loans that require you to pay interest owed, your payment is 100% of the interest accrued during the month but no principal. Your payment may not be fixed if your interest rate or principal balance changes.
We hope this summer and calculator are useful. If you have questions, please contact us. If you feel overwhelmed by debt and money matters, we can help you take back control. As a Licensed Insolvency Trustee, we can substantially reduce and eliminate debt with federal government-authorized bankruptcy and consumer proposal services.
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