Line of credit can be a lot helpful at times when you cannot bear the interest in the beginning of the loan nor do you require the entire amount for you needs.
If you are looking for borrowing money, there are multiple options available. Gone are the days when any loans could be received from the banks only and that too once the tough and lengthy application procedure was completed.
However, with surge in the demand of the loans and the change in the lifestyle of people, banks are simply unable to cater to the demands of the customers.
There are several private lenders who have got into the business and they are offering loan products which can be availed by people with bad to worst or even ones with no credit at all.
One of the important modes of getting loans is the line of credit. Under this, the borrowers are granted a fixed amount of funds as loan and they are allowed to take the loan amount in installments depending on their need.
However, these loans are a lot popular and frequently used by the businessmen and entrepreneurs. When we look at the individual borrowers, these loans are yet to pick pace.
The reason behind the same is the awareness amongst the people regarding the lines of credit. These are never a preferable option for the lenders as they do not earn great profits on them.
Understanding what is a line of credit
A line of credit is a flexible loan which has gained a lot of importance in the current times. These are offered by the banks or some financial institutions to the borrowers who do not require the entire amount in a lump sum but over an extended term where they can avail the loan.
A line of credit is like a credit card with limited amount of money which you can use whenever you want. Just in the case of a credit card. If you have any financial crisis you can use the line of credit, then after that the individual can pay back immediately or in a specified period of time as per his or her convenience.
As soon as you borrow money you will be charged with interest from that very time. The borrowers should be approved by bank in order to avail the loan.
Banks though have started to market the products and advertise them among the individuals as well. This may be because of the economic conditions which have forced the loan demand to go down and the new regulations which have restricted the fee based sources of income to go up with it.
Lines of credit offers lower risk than the credit card loan, this is why it is more convenient for the individuals to use it in exchange of credit cards.
For the banks the line of credit are never a preferred way of doing business. These loans are more beneficial to the borrowers and serve them well. So, one would wonder as to why the banks agree to these loan requests at all?
These loans are more of building a customer base and have little to do with the profits of the banks. Nowadays with the advent of the online banking practices and also the lending practices, a lot of time of the banks and the lenders are employed into associated businesses.
One of them is related to the tie- ups with the insurance companies for selling their products to the customers. All this offers a lot of support when we talk of the fundamentals of the businesses and the boosting of the bottom-line.
Line of Credit – When it becomes crucial
Banks are not really interested in giving one time personal loans or the unsecured loans for most customers, the line of credit tries to solve this problem.
On the other hand it is not convenient for the borrower as well to borrow money from bank pay the dues and then repay the loan amount and again next month follow the same cycle.
Line of credit is like a middle path to both these problems. This tries and find the mid way and provides solution to both bank and the borrower. It issues a particular sum of money to borrower whenever the borrower needs it.
In a lot of scenario, noticeably in case of the purchase of home under construction. The line of credit serves as the best option here.
The borrower is approved a loan amount equivalent to 80% of the value of the property under consideration.
Instead of offering the entire amount as a lump sum, the loan is taken by the borrowers as and when the builder demands the money, The bank too checks on the validity of the demand each time before making a loan disbursement.
This acts in favor of the borrower as an added safety to their loan amount.
All in all there are a lot of occassions where the line of credit becomes the only option for you.
Similar to any loan, the amount taken as line of credit has to be paid within a specific time limit. There is an interest associated with these loans. One would definitely need to have a great credit score to get the line of credit.
Pawn Loan/Payday Loan
There is an evident similarity between the line of credit and the Payday loans. Anyone in need of small amount of money are seen to take payday loans every now and then. Under the line of credit too one can avail the loan as an when they require money.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
While living overseas, he uses PureVPN for a low cost VPN service.
He recommends Bluehost for setting up your own personal and/or business blog.
While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.