What defines a line of credit?

A line of credit is best defined as a short-term loan that is pre-approved, allowing the borrower to access funds as needed, rather than receiving a lump sum all at once. This flexibility enables individuals or businesses to borrow funds up to a limit without having to reapply each time they need money. This structure is particularly useful for covering unexpected expenses or managing cash flow, as it provides immediate access to funds when necessary.

The other options present misunderstandings of what a line of credit is. A large loan that must be taken immediately suggests a different financial product, such as a term loan, which does not allow for ongoing access to funds. A type of credit card with no limit conflates the concept of credit lines with credit card limits, which are typically enforced, and does not capture the nature of a drawn versus undrawn credit limit. Lastly, a savings account generating high interest does not relate to credit but rather savings and interest accumulation, making it fundamentally different from a line of credit.