What is LOC Full Form in Banking?

The LOC full form in Banking is a Letter of Credit. A bank gives a Letter of Credit (LOC) to guarantee payment for goods and services purchased by the requester. An irrevocable letter of credit (ILOC) cannot be revoked or modified without the explicit approval of the parties involved. The issuing bank cannot amend the terms of an ILOC if the requesting company changes its mind.

Advantages of LOC in Banking:

The main advantage of the LOC is its high degree of flexibility. Borrowers can request a specific amount, but they are not required to utilize it all. Rather, individuals can adapt their spending from the LOC to their requirements, paying interest only on the amount drawn, not the total credit limit. Borrowers can also change their payment amounts according to their budget or cash flow. They can, for example, repay the entire outstanding balance at once or make only the minimal monthly installments.

How does a Line of Credit Work?

It works similar to a revolving account. After approval, users will be able to borrow money up to their credit limit, and they can repay the borrowed amount to borrow again, which is similar to the working mechanism of a credit card. The bank will charge interest on the amount that has been borrowed and not on the entire credit limit.