Chap 7: Lines of Credit

Not too many years ago, a properly trained and capable lending officer, often known in the community, and established in the branch, would actually become involved in the application for a loan. They would take a credit application, review the reason for the loan and even offer a little financial advice or insight.

But internal costs to lend small amounts were becoming very costly when compared to their potential interest income. The alternative for many of these smaller loans was to add it on a charge card, or an overdraft, which was often unacceptable because of the high interest rate for both. Lenders certainly wanted to retain their clients, but also wanted to make each account profitable at the lowest possible expense. The most efficient solution for them and their clients became a line of credit that has always been widely used by corporations to finance their ever-changing inventory and accounts receivable.

In some ways, a line of credit is almost like a checking account. It becomes a permanently useable loan, set up for a fixed amount and continuously available and open similar to a credit card, but with much more attractive rates. It allows a customer the freedom to use any or all of it for whatever reason at any time. In fact, lines of credit come with checks and even an ATM card to be able to access them.

The application process is the same as other bank loans; it’s just that you won’t need to see your banker any more when you want another loan in the future. On the other hand, it can be like a permanent debt. It allows a one-time set up and turns the discipline of payments over to the priorities of the consumer. A $5,000 line of credit can be used for any reason at any time. Just like the limit on a credit card, this approved amount is in place and its use is up to the individual.