How Lines of Credit Work. Types of Lines of Credit. Part2. How Lines of Credit Work. Types of Lines of Credit. Part2
Two main types of lines of credit are available to money-seekers: the personal line of credit and the business line of credit. With both types, the financial institution that provides your line of credit will set a limit on the credit, similar to a credit card limit. Personal lines of credit are secured by the person's property. Personal property, such as a house, is the collateral that the lender can seize if the individual fails to pay back the loan.
The most common line of credit, and therefore the best example of how lines of credit work, is the home equity line of credit (HELOC). When you get a HELOC from your mortgage lender or other financial institution, you have a set period of time during which you can draw on the line of credit. This period is aptly named the draw term. During this term, you use checks, a special credit card or another method to use the money in your line of credit. Since HELOCs are long-term lending agreements, draw terms tend to be around 10 years.
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