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What Is an Advance Line of Credit?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 August 2016
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An advance line of credit (ALOC) is a type of revolving credit line that is established for possible use in the future. Unlike other types of funding, an advance credit line is not committed to specific uses, making it ideal as a backup resource for managing unanticipated financial opportunities or some type of financial setback. In many cases, an advance line of credit is secured with the use of a qualifying asset, although some lenders will extend an unsecured line of credit to qualified customers.

One of the major benefits of this line of credit is the ability to obtain money when and as needed, without the necessity of going through some type of qualifying process. For example, if a homeowner had established an ALOC and needed funds to pay off medical bills after experiencing some type of accident, this could be managed by simply writing a check on that line of credit. This allows the owner to repay the balance in terms that are typically superior to other forms of financing, avoid negative entries on credit reports, and still manage to cover normal household expenses without a great deal of difficulty.

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Many institutions that provide an advance line of credit require that the applicant meet basic criteria such as a credit rating that is above a certain level. The applicant must also demonstrate a history of managing money responsibly, and generally exhibit the ability to repay any funds borrowed against the credit line according to the terms and conditions that govern that line. In exchange for meeting these qualifications, the approved applicant receives access to the credit line at any time he or she wishes, and pays interest only on the balance of that credit line that is in active use at the beginning of any given billing period. Often, the rate of interest charged on an advance line of credit is competitive with other funding options, while offering a level of convenience that is difficult to match.

It is not unusual for financial institutions to establish specific guidelines for the use of an advance line of credit. For example, the lender may set a minimum amount that must be borrowed at any one time. This means that if the owner of the credit line needs funding for an amount that is less than that minimum, he or she may elect to find some other source of funding. As an alternative, the owner may borrow that minimum amount, settle whatever financial obligation has arisen, and use the remainder to make a payment on the outstanding balance of the credit line. Assuming that the full amount is repaid in the same billing period in which it was borrowed, there is a good chance that the owner will not owe any interest at all.

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