Guide · Lines of credit, explained
Do you pay interest on the whole line or just what you draw?
By Alex Makowski Published
Interest runs on the drawn balance only, for the days it is drawn. That is the defining feature of the product. But interest is not the only charge: maintenance fees, draw fees and non-utilisation fees on the undrawn portion all exist, so an unused line is not automatically a free one.
In this guide
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01
How the interest actually works
Draw $20,000 against a $75,000 limit and interest accrues on $20,000. The remaining $55,000 costs no interest.
It is normally charged on the daily balance, so ten days of use costs ten days of interest. Repaying quickly genuinely costs less, unlike a fixed factor rate.
This is why a line beats a lump sum for a gap that opens and closes: the lump sum charges you for the whole amount for the whole term whether the money is working or sitting there.
02
The fees that are not interest
Maintenance or annual fees, charged simply for having the facility.
Draw fees, a flat charge or small percentage per draw, which make frequent small draws disproportionately expensive.
Non-utilisation fees on the undrawn balance — less common in small-business lines than in commercial banking, but they exist.
Minimum draw amounts and minimum interest periods, which can mean a three-day need costs a month.
03
How to compare two offers
Model a realistic year: how often you would draw, how much, and for how long. Then total interest plus every fee under each offer.
A lower rate with a draw fee frequently loses to a higher rate without one, for a business that draws often.
Ask for the fee schedule in writing. 'No cost unless you use it' is a summary, and the schedule is the fact.
Written by
Alex Makowski, Owner
Alex Makowski owns and runs Business Loans for America and has been placing funding for U.S. small businesses since 2021. Businesses he has worked with have secured $50M+ in financing across 1,200+ placements. He writes and reviews every guide on this site.
FAQ
Related questions.
- Is there a penalty for repaying a draw early?
- Almost never — early repayment is the intended use and simply reduces the interest. Check for minimum interest periods, which can blunt it.
- Does an undrawn line cost anything?
- It can, through maintenance or non-utilisation fees. Ask for the schedule rather than assuming zero.
- Can I draw the full limit at once?
- Usually yes, though at that point you are effectively holding a term loan at a revolving rate and a lump sum may be cheaper.
Guides
More on lines of credit, explained
With weak credit
Hardest product to get this way — secure it or use another one.
Secured or unsecured
Collateral buys a lower rate and a bigger limit — and real risk.
Drawing on it
As often as you like — but watch minimums and draw fees.
If it is cut
Usually account conduct, and usually visible months in advance.
How it works
An approved limit you draw against, repay, and draw again.
Line of credit vs card
The card is easier to get. The line gives you cash at a sane rate.
Sources
- Consumer Financial Protection BureauFederal consumer-finance regulator. Publishes guidance on credit terms and disclosure.
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