What is a revolving line of credit?

A revolving line of credit is defined as a loan that allows continuous borrowing up to a set limit. This financial arrangement provides the borrower with flexibility; they can withdraw funds as needed, up to the established credit limit, and repay them over time. Once the borrowed amount is repaid, the credit becomes available again for future borrowing.

This is particularly useful for managing cash flows in situations where expenses may fluctuate, allowing individuals or businesses to access funds without the need to reapply for a loan each time additional capital is required. The interest is typically only charged on the amount borrowed rather than the entire credit limit.

In contrast, a one-time loan that must be repaid immediately does not feature the flexibility associated with a revolving line of credit. A type of savings account is primarily used for storing and growing savings rather than borrowing. A type of secured loan generally involves collateral, which is not a characteristic of a revolving line of credit. Thus, the continuous borrowing and repayment capability is what distinctly characterizes a revolving line of credit.