What Is a Line of Credit and How Does It Work?
6 Min Read | Last updated: July 23, 2026
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
So what is a line of credit? It could be a flexible tool that helps you stay on top of your finances, with interest that accrues only on what you borrow.
At-A-Glance
- A line of credit (LOC) is either a secured or unsecured revolving loan that lets you borrow up to a certain amount of cash during a draw period, and interest only applies to what you borrow.
- After the draw period, a repayment period kicks in. At that point, you can no longer borrow, and you must pay back any remaining balance plus interest within a set timeframe.
- LOCs may have higher or lower borrowing costs than other options, and they can be most helpful when you need the flexibility to draw different amounts of cash at different times.
Life is famous for throwing cash-flow curveballs that can severely complicate how well you stay on top of your bills—the huge copay, the HVAC repair, the client who never pays on time... In those situations, you may want to avoid relying on credit cards with high interest rates. That’s where a line of credit (LOC), a type of flexible loan, can help.
What Is a Line of Credit And How Does It Work?
A line of credit (LOC) is a revolving loan, meaning it has a draw period during which you can borrow up to a set limit, repay that amount, and have the line refreshed—and you can repeat that process as often as needed. For LOCs, the draw period typically lasts about 5 years.1 Afterward, during your repayment period, which can span 7 years or more, you can’t borrow anymore and must pay back the balance, along with any accrued interest.2
Here are some other key LOC features:
- Fees
Many LOCs include fees, including origination and maintenance fees, as well as transaction and penalty charges. - Interest rates
LOC lenders charge interest on remaining balances. Those rates can be fixed and remain steady, or variable and fluctuate up or down. - Payments
You can make minimum monthly payments to avoid penalty fees, but you can also pay more than the minimum each month—or pay off entire balances in full. - Collateral
Some LOCs are secured and require collateral, meaning you agree to give something up if you can’t pay back what you owe, like your car or a portion of your home. But many LOCs are unsecured and don’t require collateral.
Different Types of Lines of Credit And Who Should Use Them
Here are the main LOC types and what you can use them for:
- Home Equity Line of Credit (HELOC)
HELOCs are secured LOCs for homeowners. It uses your home equity, the percentage of your home that you own, as collateral if you default. HELOCs are great for home renovation projects or debt consolidation, but they’re risky since the lender can seize your home if you don’t pay back your debt on time. - Personal Line of Credit (PLOC)
PLOCs are for individuals, freelancers, or independent contractors, and when they’re unsecured, your credit score often influences whether you’re approved for one. With secured PLOCs, you typically have to invest in a certificate of deposit (CD), a type of savings product that generates interest, and agree to use it as collateral. PLOCs can come in handy during emergencies, streamlining debt payments, or when dealing with late payments from clients. - Business Line of Credit
These LOCs are for businesses that need to manage operational expenses. Business operators can typically access the LOC’s funds through their accounts receivable, payroll, or business checking accounts. Business lines of credit can be super useful during cash flow lulls or for costs related to opening for the first time.
What Are The Advantages and Disadvantages of a Line of Credit?
LOCs have their upsides and downsides, and you might want to weigh each before deciding on another borrowing product, such as a credit card or a personal loan (lump-sum loans you have to start making payments on immediately).
The advantages of using a line of credit:
- Compared to credit cards, LOCs typically have a lower annual cost, referred to as an annual percentage rate (APR).
- LOCs provide easy access to cash whenever you need it during the draw period—and they can allow for instant online or app transfers, offering even greater ease.
- Interest only accrues on the amount you draw from the LOC, not the entire line.
- Opening an LOC increases your overall available credit, which can help lower your credit utilization (how much of your available credit you’re using) and potentially benefit your credit score.
The disadvantages of using a line of credit:
- LOCs may have higher rates than unsecured personal loans, which are more popular than secured personal loans.
- LOC lenders may require a good or excellent credit history to approve you, which can be time-consuming to achieve.
- If you opt for a PLOC, you’ll likely have a variable interest rate, which can swing dramatically and complicate monthly budgeting.
- Applying for a LOC involves a hard inquiry, which is when a lender examines your credit report and triggers a temporary but noticeable drop in your credit score.
How To Make The Most of Your Line of Credit
If you’re ready to apply for your line of credit, here are some tips to make the most of it:
- Understanding the Length of Each Period
It’s in your best interest to know how long you can dip into your LOC (your draw period), and when you’ll have to start making payments and can no longer access it (your repayment period). - Knowing Your Minimum Payments
Your LOC lender will inform you of your repayment due dates and minimum amounts, which is crucial, as missed or late payments can negatively impact your credit scores in the long term. You can also set up automatic payments to make sure you never miss a deadline. - Anticipating Interest
Lenders may start charging interest on the balance you owe immediately, even if you’re just drawing on funds for a couple of weeks between paychecks. Also, preparing for a fixed interest rate doesn’t require as much budget consciousness as a variable rate, so it’s helpful to be aware of which applies to your LOC. - Being Aware of Fees
Some lenders might charge monthly or annual maintenance fees, while others may charge you every time you draw from the LOC. Knowing which actions trigger what fees can help you save money.
Frequently Asked Questions
Whether a personal loan is better than a line of credit depends on your financial goals. Personal loans often work best for fixed, one-time expenses or debt consolidation. LOCs may be more useful in situations that require flexibility, like a large home project or a wedding—but it’s always best to avoid spending what you know you can’t pay back in time.
That depends. A $30,000 credit line can be good if you know that you won’t need to draw on all of it at once. However, if you only need, say, $5,000, taking out a $30,000 LOC may tempt you to overspend or take on more debt, fees, and risk than necessary.
The Takeaway
A line of credit is a revolving loan (either secured or unsecured) that provides easy access to a set amount of funds, which you can draw on and repay over a set period. Afterward, you lose access to the line and must repay any remaining balance plus interest (which only accrues on what you borrow). HELOCs, PLOCs, and business lines of credit are the most common types, and just like other borrowing products, late or missed payments can deeply impact your credit standing. LOCs are best for when you need flexible access to funds to finance renovations and business expenses or weather financial storms that temporarily halt cash flow.
1,2 “What Is a Line of Credit?,” Experian
Carla Fried is a freelance journalist who has spent her entire career specializing in personal finance. Her work has appeared in The New York Times, Money, CNBC.com, and Consumer Reports, among many other media outlets.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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