What is a revolving line of credit?

A revolving line of credit allows someone to borrow by using a credit line with a maximum credit limit. Borrowers can apply for a revolving credit account and, if approved, take out loans against their credit line until their balance reaches their credit limit. Repayment terms can vary, but commonly, borrowers can repay the amount owed all at once and borrow the money again, or they can pay a portion and revolve the remaining balance into the next billing period.

How revolving lines of credit work

A revolving line of credit has a cyclical nature: You draw funds, and then you repay what you’ve borrowed to free-up more credit to borrow against.

How draws and fees work

Borrowing money against your revolving line of credit is known as a draw. How much you can draw is determined by your maximum and available credit limits. For example, let’s say your maximum credit limit is $500,000. You draw $40,000 from that, leaving you $460,000 in available credit to draw against until you repay that $40,000 draw (along with any interest owed).

Depending on how your line of credit is structured, you might pay a fee on the initial account setup, or every time you draw. You might also pay monthly, annual, or inactivity fees.

How repayments work

Repayment terms for lines of credit vary depending on the lender. Many lines of credit treat each draw as an individual term loan, where as soon as you borrow money, you begin to pay it off on a fixed schedule. Then, if you make an additional draw, the loan is re-amortized. Loan re-amortization, also called loan recasting, occurs when a loan’s terms and repayments are adjusted based on a borrower making a larger-scale payment.

Other lines of credit have defined draw and repayment periods, where you can make multiple draws before having to make repayments.