Line of Credit

• A line of credit has more flexibility compared to many term loans that borrowers must take out in their total amounts at once and repay within a specified period of time. A line of credit can be drawn on at any time and in any amount, if within the credit limit. For consumers, a line of credit that is linked to their checking accounts can function like a credit card. Interest is charged on only the money taken out, and the unused portion is saved for future uses.
  
  

Unfunded Credit

• Unlike a traditional loan that must be fully funded by the lender after customers have signed up for the loan, a line of credit needs not to be funded at the time a financial institution approves a customer's credit request. Financial institutions stand ready to honor any draws by customers at any time. Having a credit line fully funded would be ineffective for the operations of a financial institution, considering that customers obtain a line of credit mostly for emergency purposes, as well as may not use it all at once.
  
  

Multiple Credit

• A financial institution may not need to fully fund its line of credit, depending on the structural uses of the credit line. A line of credit may be structured as close-ended to allow only a specified number of advances. Customers can draw on their line of credit in incremental amounts up to the credit limit while also making scheduled principal payments. Under the multiple-advance structure, any principal reduction received by the financial institution is not immediately available for customers to draw on, affording the lender certain degree of funding flexibility.
  
  

Revolving Credit

• A revolving line of credit is also referred to as an open-ended line of credit that allows customers to continually draw against the limit of their lines of credit. Under the revolving-credit structure, any required payments made by customers become immediately available for future advances. However, a financial institution providing revolving lines of credit does not necessarily have to fully fund its line of credit either, because most of the time customers make only partial advances and their own repayments can cover part of the advances.