At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
A cash line of credit is a type of revolving credit line. When a person has one, a bank or other financial institution extends a specific amount of credit from which he can borrow as he pleases. The borrower may draw money from the cash line of credit as often as he needs to, as long as he does not exceed the maximum credit amount set by the financial institution. When he repays the money he withdrew, however, the line of credit is not closed, as would be the case with a basic loan. Instead, the line of credit typically remains open for the borrower to withdraw from in the future.
To understand this concept, it may help to consider an example in which a person has a cash line of credit worth $5,000 US dollars (USD). In such a case, the borrower may first withdraw $2,000 USD to make repairs in his home and then later withdraw $500 USD for car repairs; this means he still has $2,500 USD to use when and how he wishes. When he repays the $500 USD he borrowed, he will have $3,000 USD from which to withdraw. Once he pays the entire amount back, he will have $5,000 USD as his line of credit once more. He usually does not have to repay the money he borrows before he can borrow more, but he does have to follow the borrowing and repayment terms set by his financial institution.
A cash line of credit is often unsecured. This means the borrower doesn’t have to provide any collateral to obtain an unsecured cash line of credit. In some cases, however, a line of credit is secured with some type of collateral. For example, a person may receive a loan against the equity in his house and take a line of credit instead of a lump-sum payment. In such a case, the borrower’s home would be the collateral for the line of credit.
Sometimes people prefer cash lines of credit to traditional loans because of the manner in which interest is handled. With a cash line of credit, a person isn’t charged any interest until he actually uses some of the money in the credit line. Many people also appreciate the fact that cash lines of credit are usable whenever they are needed, without having to reapply or ask the financial institution’s permission.