Lines of credit are a form of flexible, direct loan from a financial institution, usually a Bank, and natural or legal. As credit cards, lines of credit have predefined limits on loans, a borrower can use the account at any time, if the limit is not exceeded. Also like credit cards, lines of credit, tend to have relatively high interest rates and some annual fees, but interest is not charged if there are arrears on the account.
Interest is usually calculated monthly using the average daily balance method. This method is used for multiplying the amount of each purchase on the credit line for the remaining number of days in the calculation period. This amount is then divided by the total number of days in the billing period to find the average daily balance of each purchase. Average purchases are aggregated and added to any existing balance and then the average daily volume of payments on account are deducted. The remaining average balance multiplied by the annual interest percentage rate (Apr).
Interest rates, as a rule, periodic rates, which are calculated as 1/365 part of the APR multiplied by the number of days in the calculation period. There are many other ways interest is calculated and credited, but most financial institutions to use the above methods to credit lines. Most lines of credit, even home equity lines of credit that use simple interest unlike compound interest. Some credit lines also demand loans, which are structured to allow the lender to call the total amount of debt (including interest) at any time for immediate repayment.