Even with a smooth-riding economy, it’s still possible to need money for various reasons such as covering medical bills. However, regardless of the situation, you may want to opt for a line of credit (LOC) to fill the financial gaps.
The reasons include paying interest on the amount only when you borrow. Also, after paying the entire amount, you’ll still have a chance to borrow it again.
You see, an LOC offers you flexibility since you have the ability to choose when you borrow the money—you can rinse and repeat, but only if you can follow the terms and conditions set out by your lender. Therefore, an LOC is the best option despite not receiving much advertising.
This article takes a look at how credit lines work and how you can use them to your advantage.
What is a Line of Credit?
A line of credit is a type of loan given out to handle a certain purpose. For instance, you can take out a home equity LOC to repair or renovate your house.
Furthermore, it’s different from a regular loan where you’ll have to start paying interests as soon as you receive the disbursement, because with an LOC, you won’t pay any interest until you borrow.
How it Works
Similar to a credit card, an LOC will allow you to access funds the moment you need them. The only advantage this type of credit comes with is the lower interest rates, which are absent in credit cards.
In addition, an LOC comes with higher spending limits compared to credit cards, which generally have lower limits.
What’s more, you’ll receive monthly statements with details on due payments, interest, and fees, including your balance. However, your repayment will depend on your agreement with the lender and may extend to as long as required.
Lines of Credit: The Different Types
Various reasons may lead you to take out an LOC, but they’ll depend on your overall financial situation. For example, you may need money to take care of an emergency, pay college tuition, or simply plug in a deficit in your budget.
Regardless of how you look at the situation, an LOC may be your best option, and they come in two main types:
- Secured Line of Credit – With this type of credit line, you’ll have to provide collateral to back your nation21loans. This may be your home, car, or any type of asset. Since you’ll have collateral, the lender may lower the interest rates since they know if you default, they’ll have no problem recovering their money.
- Unsecured Line of Credit – In contrast, this type of credit doesn’t require any form of security. For this reason, it may be difficult to qualify for this LOC. Moreover, brace for high interest rates due to the absence of any form of collateral to guarantee your repayment.
Personal Line of Credit
This type of credit doesn’t require any form of collateral to take out if they’re unsecured. That means the money will come with sky-high interest rates. However, with the secured ones, you’ll need collateral to back your loan, but then you’ll benefit from low interest rates.
When applying for a personal LOC, keep in mind your credit score. A good score will result in lower interest rates, while a poor one will subject you to high interest rates. Apart from these rates, some lenders apply other fees, including annual fees, while others impose a certain limit to the amount you can borrow.
Should you manage to get the LOC, you’ll enter a draw period—a fixed timeframe where you can draw the amount from your account. This period may last up to several years, and you have the liberty to move the amount into a checking account when you feel ready to use the money.
After borrowing the money, the interest will start accumulating, which means you must start making payments. However, after the draw period comes to a close, you’ll enter another timeframe known as the repayment period.
In this period, you must set a timeframe, which you’ll offset with the remaining amount.
Home Equity Line of Credit
If you have plans to renovate your home, then a HELOC may be your best bet. As the name suggests, this type of loan will use your home’s value as collateral. Therefore, HELOCs are low on interest rates and fees thanks to lower risks.
Taking a HELOC with the same lender as you did with your mortgage can be beneficial since they already understand your finances, but you can also apply for one with a different financial institution. Similar to a personal LOC, a HELOC also comes with a draw period lasting up to 10 years before you can start making payments on the remaining balance.
Business Line of Credit
As a startup or a small business owner, there comes a time when you need growth and expansion. However, such activity requires financial muscle, which may be lacking for such a business. In such a case, a business line of credit may come in handy.
This loan will help you acquire new equipment, stock inventory, or plug financial gaps. This will allow you to maintain a steady cashflow in order to ensure your business stays afloat.
Nevertheless, you’ll need to secure this loan using various business assets, including existing machinery and inventory.
Taking out an LOC can help you to secure funds for a future project, especially if you don’t know exactly when they’re needed.
However, you must be aware of the hurdles involved. First off, your credit may take a dip should you fail to make on-time payments or even skip them altogether. Even worse, you could lose your collateral.
If you’re struggling with your bills, you can opt for other options, but the bottom line remains: Take a good look at your financial situation before you apply for any type of LOC. This will help you analyze how much you can afford to borrow.