What is a line of credit?

The use of the term credit line is very frequent in the institutional and business sphere; although in many cases it can also be applied in the case of individuals who resort to a type of finance that is more flexible in certain everyday situations. However, due to ignorance of the operation of the credit line, it is often confused with the loan conventional.

A line of credit is an amount of money that a bank grants the holder of a checking account to make use of it when it has lost liquidity. The credit line is a permanent credit that can be used at any time but must be replaced in accordance with the contractual terms established between the parties (the bank and the client).

Therefore, if in a certain situation a collection check arrives and the client does not have liquidity, the bank will take the money from the credit line and thus the protest of the collected document will not take place. Generally, for a line of credit, interest must be paid on the amount of money that is used. However, depending on the case, certain commissions may also be generated by the use and / or by the associated policies; such as, for example, a tax relief.

In a few words, it could be said that a line of credit is an extension of money that a bank grants to a customer for a certain time and with an established maximum limit. It is a kind of current account with an amount that the bank makes available to a customer with the particularity that the money belongs to the entity and not to the customer. So that the client can make use of this credit account as many times as she wants as long as it is within the stipulated limits and with the obligation that once the term has expired, the owner of the line must have replenished the initial balance. During this period, the entity is charging commissions for operation and interest.

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