What is a line of credit? A revolving credit agreement?

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What is a line of credit? A revolving credit agreement?

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What is a line of credit? A revolving credit agreement?

Explanation & AnswerSolution by a verified expert

Explanation

A line of credit also known as a bank line is an informal agreement that indicates the maximum credit limit the bank will provide to the borrower at a specified interest rate. Once the credit is sanctioned, it is not necessary that the borrower needs to withdraw the credit all at once. Rather, it can be used for the additional financing needed. The interest is charged on the amount actually withdrawn by the borrower from the actual line of credit.
 
The revolving credit agreement is a way of granting credit where a syndicate of banks comes and lends money to the borrower, who in turn is required to pay a commitment fee on the unused balance of the credit and interest on the amount borrowed. Here, the bank is liable or has a legal obligation to honor the agreement because of the commitment fee paid by the borrower.

Verified Answer

The line of credit is a type of flexible loan provided by banks or other financial institutions to an individual, business, or government that too up to a maximum limit they have in credit line.
 
The formal line of credit is an agreement between a borrower and lender under which borrower is assigned a certain credit limit. This limit is based on credit history, score, and income. It is generally used by large banks and also called as a revolving credit statement.

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