Glossary term
Line of Credit
A line of credit is a flexible borrowing account that lets you draw money up to a set limit, repay it, and borrow again. You pay interest only on the amount you have drawn, not on the full limit. Personal, business and home equity lines are common, and most carry variable interest rates.
Updated October 17, 2026 · Editorial Team
How Line of Credit works in practice
During the draw period you can borrow as needed, often with interest-only or small minimum payments. Some lines then switch to a repayment period in which you can no longer draw and must pay down principal on a schedule. A home equity line is secured by your home, which usually means a lower rate but more risk.
Say you have a $15,000 line at 10.50% and draw $5,000. Interest for a month is about $5,000 × 0.105 ÷ 12 = $43.75. The unused $10,000 costs nothing in interest, though some lines charge annual or draw fees.
A line of credit can be cheaper than a credit card for uneven expenses, but its variable rate can rise, and interest-only payments do not shrink the balance. Setting your own payoff schedule keeps the balance from lingering.
Line of Credit: quick questions
Is a line of credit the same as a loan?
Not quite. A loan gives you a lump sum once. A line lets you draw, repay and draw again up to a limit.
Do I pay interest on the full credit limit?
No. Interest is charged only on the amount you have drawn.
Can my line of credit rate change?
Most lines have variable rates tied to a benchmark, so the rate and payment can change.
Sources
- Regulation Z (Truth in Lending), 12 CFR Part 1026 — Consumer Financial Protection Bureau. Accessed October 17, 2026.
- Credit cards — Consumer Financial Protection Bureau. Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations. See our methodology.
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