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What is a Line of Credit Agreement?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 22 September 2016
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A line of credit agreement is a legal agreement enumerating the terms and conditions associated with a line of credit. Before credit will be extended, a borrower must read and sign the agreement. Lenders typically use generic line of credit agreements with their borrowers, although a specific agreement can be drafted for a particular case with unique circumstances. Borrowers are usually encouraged to retain a copy of the agreement for their records and future reference.

Lines of credit are a form of unsecured revolving credit. Borrowers are not required to furnish collateral to back the line of credit and they can run up charges to the maximum and pay them down to access more credit. This can be continued until the line of credit expires, at which point the borrower will enter repayment, unless the borrower applies to extend and the bank decides to grant the request.

The line of credit agreement contains important information about the line of credit. It tells the borrower about the credit limit, interest rates for different types of transactions, how to access the credit, where to send payments, who to contact about problems, and how long the line of credit will last. The line of credit agreement can also discuss terms of repayment, including terms like setting up the line of credit as a demand note, allowing the lender to request the balance in full immediately.

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Borrowers applying for lines of credit often choose to compare offers from several financial institutions to find the best deal. Many companies will provide people with sample agreements to read while they are deciding where they want to open a line of credit. Comparing and contrasting different agreements can give people an idea of the terms available to them in a line of credit agreement while they make a decision.

As with other legal contracts, people have the right to review a line of credit agreement in detail before signing it, and can ask for explanations of specific clauses or request a review by an attorney before agreeing to the terms. People can also request copies for their records, and if changes are made to the agreement, the financial institution must send notification and provide information about how to respond to the notification. Typically, the borrower works with a specific loan officer when applying for a line of credit, and this person acts as a point of contact with the financial institution if there are problems or concerns in the future.

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