What is a Line of credit?
A financial institution, normally a bank or mortgage lender, make funds available for you to draw from up to a specified amount. There is no determined amount you have to borrow only the actual limit that is specified. Time wise it can be over a number of years. It is also called revolving line of credit or open- end credit.
Why not just get an ordinary loan or use a credit card?
A number of reasons why lines of credit are a better option:-
- Unlike a traditional loan the interest rate is generally lower and the amount higher.
- With an ordinary loan you get your lump sum and start paying back straight away. With lines of credit you borrow as and when you need it and on most you would then start to pay back interest.
- It allows the borrower to have the flexibility to cover outgoings when income is short, for example a seasonal business.
- It can arranged prior to becoming necessary, allow you a great deal more leeway with you financial planning.
How do I get a line of credit?
Before you sign up for any form of credit you need to decide which is best for you;
- A personal line of credit – this is one which is secured by your property as collateral. Meaning if you don’t pay they can take your house. A home equity line of credit (not a second mortgage) is one example of this, with this you have an agreed ‘draw term’ during which you can access the funds using either checks or a card. The interest on this credit is normally a variable interest rate based on the prime rate plus a percentage. So if the rate goes up or down so too does your interest. Repayments are worked out with the bank and can be monthly or complete amounts; they can also be only for the interest or interest and principal amount.
- Business line of credit – similar to personal but where business assets are the collateral.
To apply for lines of credit, as with any loan your credit score is examined to check out your credit history. The financial organization will also want to look at your ability to repay. If for a business then the profit/loss of your company and its financials will be evaluated. The amount you have access to is decided by the financial institution on a calculation of debt owed and collateral available.
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