A line of credit lets you borrow up to an approved limit as you need funds. With a revolving facility, repayments free up credit you can use again while the account remains open and withdrawals are permitted.
The limit is borrowing capacity, not money you own. Interest, fees and the lender’s review conditions affect how much you can use and how long the debt lasts.
Understand How a Line of Credit Works
A drawdown increases the amount you owe and reduces your available credit. Repaying principal reverses that movement, provided the lender has not reduced or suspended the limit.
Consider a hypothetical $50,000 revolving limit, ignoring interest and fees for this illustration. Drawing $12,000 leaves $38,000 available. Repaying $5,000 reduces the debt to $7,000 and restores available credit to $43,000. A later $3,000 draw takes the debt to $10,000 and leaves $40,000 available.
Available credit is the limit less the balance owed, subject to any holds or withdrawal restrictions. A repayment must reach the account before it can reduce the balance used for interest.
A line-of-credit account records borrowed money owed to the lender, unlike a deposit account holding your cash. In the example, the approved limit stays $50,000 through each transaction. Interest starts accruing on the $12,000 drawn balance, falls after the $5,000 repayment and rises when another $3,000 is drawn. Posted interest or fees also use available credit.
An instalment loan has scheduled repayments over a term. A non-revolving facility does not restore borrowing capacity when principal is repaid. Revolving access matters when you expect repeated draws, such as paying suppliers before customers pay your business.
A personal loan can fund a single purchase with a known price and a scheduled payoff date. A business term loan can do the same for a piece of equipment. If you need money at different dates, compare the fees for keeping a line available with the cost of borrowing the whole amount upfront.
Compare Secured and Unsecured Facilities
A secured line of credit is backed by assets the lender can claim if you default. An unsecured facility has no pledged asset, though a lender can still pursue unpaid debt.
Security is not confined to a home. NAB’s Business Overdraft can use residential, commercial or rural property, business assets or a combination. It also has an unsecured option. The security and borrower assessment affect the terms offered.
A business overdraft is a line of credit attached to a business transaction account. It can cover cash-flow gaps between outgoing payments and incoming receipts. It is different from a personal borrowing facility, whose permitted use and assessment depend on its own contract.
An unsecured line can avoid pledging property, but unsecured borrowing generally costs more because the lender has less security. NAB’s overdraft explanation describes this distinction. An unsecured label does not by itself establish whether a personal guarantee is required.
A home-equity facility is one secured form. Moneysmart’s line-of-credit definition describes this home-loan arrangement, including access to equity and interest added monthly. For property-specific borrowing, see how a home-equity line of credit works.
Compare access and permitted use as well as security.
- A personal line of credit funds permitted personal spending through repeat withdrawals. The contract sets whether it is secured and which transfer methods are available.
- A business revolving facility funds permitted business costs. Security can include assets or guarantees, and access follows the facility’s drawdown rules.
- An overdraft attaches a borrowing limit to a transaction account, allowing payments beyond its positive cash balance. Personal and business overdrafts have different use and assessment terms.
- A credit card gives revolving credit mainly through card purchases. Personal or business use follows the card’s terms. Cash advances can have different rates and fees from purchases.
A startup can lack the trading record required for a business facility. For example, NAB QuickBiz Overdraft requires more than 12 months under the current ABN or ACN, plus turnover and other eligibility conditions. That product’s online application is not a general promise of an instant limit.
Poor credit can reduce borrowing options or increase the offered rate. Limited documentation also leaves less evidence for assessment. A “no doc” or “no credit check” description does not establish approval or remove the need to show how you can repay.
Calculate the Cost of Drawing and Keeping the Facility
Interest follows the drawn balance, while some fees apply even when you have borrowed nothing. Separate the cost of using money from the cost of keeping the limit available.
This hypothetical calculation uses a fixed 10% annual rate divided by 365, with interest charged after 30 days. It assumes no other transactions or fees. The balance is $12,000 for the first 10 days, then a $5,000 repayment leaves $7,000 for the remaining 20 days.
| Period | Balance | Calculation | Interest |
|---|---|---|---|
| First 10 days | $12,000 | $12,000 × 10% × 10 ÷ 365 | $32.88 |
| Next 20 days | $7,000 | $7,000 × 10% × 20 ÷ 365 | $38.36 |
| Total | Changing balance | Rounded at the end | $71.23 |
The displayed period figures round separately, so they add to $71.24. Rounding the unrounded total gives $71.23. A lender’s rounding and posting rules determine the actual charge.
Keeping $12,000 outstanding for all 30 days would cost $98.63 under the same assumptions. Paying $5,000 earlier saves $27.40. If interest is added to the facility, the resulting balance becomes $7,071.23 and reduces available credit further.
Read the fee schedule for establishment charges and recurring facility or account fees. A fee based on the whole limit differs from an unused-limit fee based on the undrawn amount. NAB’s business fee guide lists application, service and undrawn fees for business lending, with several amounts available on application.
For a separate hypothetical fee example, 1% a year on a constant unused $20,000 costs $200 over a year. A fee of 1% on a $50,000 facility limit costs $500 regardless of how much is drawn. Add applicable fees to interest when comparing offers. Variable rates can change the interest cost during the borrowing period.
Check Repayment and Review Conditions
The contract determines minimum payments and how long you can keep drawing. A revolving label does not promise permanent access to the limit.
For example, NAB’s Business Overdraft has no set repayment schedule within its approved limit and is subject to annual review. Other facilities can require monthly payments or principal reductions. Record any expiry date and whether the lender can require repayment on demand.
Interest added to the balance uses part of the limit. Leaving enough room for charges avoids treating the full available figure as spending money. If the lender reduces a limit below your outstanding balance, the contract determines how you must repay the excess.
For an application, prepare identity, the borrowing purpose and evidence of income or business cash flow. Include current debts and security details. Business lenders can request bank statements, financial accounts and tax records, plus information about directors or guarantors. Personal facilities require evidence of household income, expenses and commitments.
If an offer has an interest-free introductory period, identify the covered transactions and the rate after it ends. Fees or other borrowing categories can still cost money during the offer. Credit-card interest-free days have separate repayment conditions, as Moneysmart’s credit-card guide explains. A temporary 0% offer does not mean a facility never charges interest.
Check when the lender can review, reduce or suspend the reusable limit, including at an annual review, expiry or default under the contract. Record any required notice and repayment consequences. Do not rely on undrawn credit as an emergency reserve that must remain available.
Repeated redraws can keep principal outstanding for years. Paying only interest leaves the borrowed principal unchanged. Set a repayment amount above charges and compare the resulting balance with your target each statement period.
A short cash-flow gap needs a defined source of repayment, such as an expected customer receipt. If the balance stays drawn after that receipt arrives, reassess whether ongoing borrowing or an instalment loan better fits the purpose.
Assess the Facility Alongside Your Other Loans
A broker assessing a later mortgage needs the line’s approved limit as well as its drawn balance. A low balance alone does not describe an open borrowing commitment.
Give the broker a recent statement and the facility agreement. Record the borrower, limit, balance, required payments and security. Include any guarantee, expiry or review condition that could change what you owe.
For example, a client with a $50,000 limit and a $7,000 balance still has access to another $43,000 before charges or restrictions. The mortgage lender applies its own policy to that commitment. Do not assume its assessment uses only today’s interest bill.
For consumer credit, ASIC’s RG 209 Credit licensing: Responsible lending conduct explains the obligations to inquire about the consumer’s financial situation, requirements and objectives, verify their financial situation and assess whether the credit contract is unsuitable. Business borrowing can involve different rules.
If you plan to reduce or close the facility before a mortgage application, agree the timing with your broker and obtain written confirmation from the lender. Paying the balance to zero leaves the approved limit open unless the lender also reduces or cancels it. Keep that confirmation with the other mortgage application documents.
