Written byA line of credit is a revolving credit facility with an approved limit that you can draw, repay and redraw, paying interest only on the drawn balance.
Also known as: LOC, home equity line of credit
Key points
- You pay interest only on the balance you have drawn, not on the full approved limit.
- As you repay, your available credit is restored, so you can draw again without a fresh application.
- Limits reflect your income and serviceability and, for secured facilities, the loan to value ratio of the security.
- Most lines of credit carry variable rates, and lenders can review or reduce a limit.
- Establishment, ongoing account and transaction fees can apply, so compare the full cost of the facility.
How a line of credit works
The lender approves a maximum credit limit, then you draw funds as you need them, usually by transferring money to a transaction account. Each drawdown adds to your outstanding balance, and interest accrues on that balance rather than on the limit. Many lenders work the interest out daily and bill it monthly.
Minimum repayments may be interest only or principal plus interest, depending on the product. As you repay, the available credit is restored up to the limit, which is what makes the facility revolving. Once the facility is set up, you can access funds without repeating a full application.
Secured and unsecured lines of credit
A secured line of credit is backed by property, commonly home equity, and the limit is usually driven by the loan to value ratio of that security. Lenders price secured facilities more sharply because the risk is lower, but if you default they can enforce against the property.
An unsecured line of credit rests on credit assessment alone, so limits are smaller and rates higher, closer to a large credit card or an overdraft. Business facilities are used for working capital, smoothing receivables and short term needs, and come from banks, non-bank lenders and fintechs. Some lenders pair a line of credit with an offset or transaction account, or split a facility between a term loan and revolving credit.
Costs and risks to weigh up
Most lines of credit are variable rate, so the cost moves with the market. Establishment, annual, transaction and limit review fees can apply, and some lenders charge if you close the facility soon after opening. Ask for the credit contract and precontractual statement, or the letter of offer for a business facility, so you can see the fee schedule and how interest is worked out.
The flexibility cuts both ways. Easy access to credit can push household or business debt higher, and interest only minimum repayments may never reduce the principal. Lenders can review and reduce a limit if your credit performance or the value of the security changes. Interest may be deductible where the funds produce assessable income, which is a question for your accountant.
Example
A homeowner renovating a kitchen is approved for a $50,000 line of credit secured against home equity. Rather than drawing the lot, they take $20,000 to pay the first builder invoice, so interest accrues on $20,000 and not on the full limit. When the next invoice lands they draw again, up to the limit, and every repayment restores the available credit. The balance rises and falls with the project instead of sitting at the full amount from day one.
Not to be confused with
- Credit card
- both revolve, but a credit card is built for transactions and usually carries a higher rate
- Term loan
- a term loan pays out the full principal up front and charges interest on all of it
Frequently asked questions
Is a line of credit the same as a credit card?
Both are revolving credit that you draw, repay and redraw. A line of credit typically has a higher limit and a lower rate, especially when it is secured against property, while a credit card is designed for everyday transactions and often comes with rewards and an annual fee.
Is interest charged on the full line of credit limit?
No. Interest accrues only on the balance you have actually drawn, not on the approved limit. Many lenders calculate the interest daily on the outstanding balance and charge it monthly. Repay part of the balance and the interest charged reduces from that point on.
Can my line of credit limit be increased?
Yes, subject to the lender's assessment. You will generally need updated income details or business financials, and for a secured facility the lender may order a fresh valuation of the property first. Limits can move the other way too, since lenders review them periodically.
What happens if I miss a repayment on a line of credit?
Missed payments can trigger fees, higher interest and negative credit reporting, which may affect later applications. On a secured facility, repeated default can lead the lender to enforce against the security. Contact the lender early if you are struggling, and take unresolved complaints to AFCA.
Are line of credit rates fixed or variable?
Most lines of credit use variable rates that move with market conditions, and fixed rate versions are rare. That matters for budgeting, because a minimum repayment can rise. It is one reason some borrowers prefer a fixed term loan for a single known purchase.
Related terms
Broader term: Credit
Revolving credit
Revolving credit is a form of credit that lets you draw, repay and redraw funds up to a pre-set limit, with minimum monthly repayments.
Read definitionCredit card
A credit card is a form of revolving credit that lets you borrow up to a pre-approved limit for purchases, cash advances or short-term finance.
Read definitionOverdraft
An overdraft is a short-term credit facility attached to a transaction account that lets you spend past your available balance up to an agreed limit.
Read definitionUnsecured loan
An unsecured loan is credit you borrow without pledging collateral, so the lender relies on your income, credit history and capacity to repay.
Read definitionHome loan
A home loan is a secured loan used to buy property or fund major home projects, with the lender taking a mortgage over the property as security.
Read definitionPersonal loan
A personal loan is a fixed term loan for personal expenses, repaid in regular instalments over an agreed period, usually principal and interest.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.