A line of credit, in most cases, is cheaper in terms of the interest that you would need to pay than a credit card. While they are both in essence a loan, a line of credit is often extended to businesses that have a financial credit history and collateral that is used as a guarantee. This makes the risk for the lender of the borrower not repaying the loan lower and therefore incurs reduced interest rates.
Key Differences: Line of Credit vs. Credit Card
A line of credit and a credit card are both forms of revolving credit that provide borrowers a convenient way to access or buy money. Understanding the difference between line of credit vs credit card can help you better navigate both topics. There are a number of notable differences between the two. The table below summarizes them.
| Key Features | Line of Credit | Credit Card |
| Average APR | Typically, lower than a credit card, especially when secured with collateral | Typically, higher than a line of credit |
| Credit Limit | Typically, much higher than a credit card, especially when secured with collateral | Typically, much lower than a line of credit |
| Grace Period | No grace period | Typically, 21 days |
| Draw Period | Typically, a few years; longer periods exist, with some rare arrangements offering an infinite draw | Infinite draw period, assuming you make the required minimum payments |
| Fees | Potentially, activation fees, annual maintenance fees, draw fees, late payment fees, and returned payment fees | Potentially, annual maintenance fees, balance transfer fees, cash advance fees, late payment, and returned fees |
| Credit Score Requirements | Typically calls for good to exceptional credit | Wide availability for high to low credit scores, with increasingly high APRs |
| Rewards/Perks | No rewards/perks | Diverse rewards, including cash back statement credits |
| Common Uses | Significant outlays, such as capital expenditures, operating expenses associated with seasonal cyclicality, and emergency repairs | Recurring expenses, such as inventory purchases, rent, utility bills, and travel expenses. |
A line of credit is an automatic recurring loan up to a specified limit which you will pay for at an agreed point in time in the future.
You only pay interest on the money you borrow. However you may be charged a fee each time you borrow from the business line of credit. The outstanding loan balance and interest simply revolve into the next billing period.
A line of credit provides you access to more cash, but the availability of the line is limited…
Different Types of Lines of Credit:
Secured:
A secured line of credit is when you pledge objects of value, such as business equipment or personal assets, like an automobile or home, to lower the risk for the institution lending you money. An equipment line of credit also allows you to pledge purchased machinery as a collateral.
Secured lines of credit loans are less risky for lenders.
They have better terms: lower interest rates, fixed-rate and variable-rate and longer terms of availability. Secured lines are much riskier for borrowers or buyers of money, because they put your assets at risk. Visit our other article to learn more about the best business line of credit rates available.
About the Authors
Written by: Thomas J. Brock
Accounting, Corporate Finance, Debt, Economics, Financial Planning, General Business, Insurance - Life Insurance, Insurance. Thomas is a well-rounded financial professional, with over 20 years of experience in investments, corporate finance, and accounting.
More about me