You’ll find yourself in need of cash at some point in life. Some of the pressing needs include medical bills, home repairs or paying for your child’s college tuition.
Often, the only way out is through borrowing. Some of the avenues include credit card debts and payday loans. These options have two drawbacks. High-interest rates and fees which put off a number of people.
However, few people think of other means to resolve the cash crunch. A credit line is one of those overlooked options. Since it comes with low interest rates, you’ll save a good amount.
Read on to find how credit lines work, and how you can use them to your advantage.
What is a Credit Line?
Also known as a line of credit (LOC), this type of loan allows you to borrow money and use it for a specific purpose. For example, you can make repairs in your home using a home equity line of credit.
Business expansion is a dream all entrepreneurs look forward to. Nevertheless, funding is a critical part of this process and this is what halts these dreams. Taking out a cash loans without credit check is out of the question because you don’t have enough or no collateral at all to put up. The remaining option is a LOC which may provide the much-needed funds.
With this option, you’ll only pay interests and fees depending on the amount of money you take out. This is different from the traditional loans where after receiving the money, you’ll start paying monthly installments.
For example, if you don’t draw money from a $10,000 LOC, you won’t pay anything in interests. The best part is, the money is available for you whenever you need it.
How Credit Lines Work
Again, with a LOC, you have the freedom to use the money at whatever time you want. It works in a similar to a credit card, but with lower interest rates.
In addition, credit lines come with higher limits for spending compared to credit cards. You’ll also get monthly statements with details such as interests, fees, payment due and the balance. As long as you draw money, you’ll have to repay the finds, but this will depend on the agreement between you and the lender.
What You Need to Keep in Mind
Lenders may perform an inquiry on your report when applying for a credit line. This will take a pinch off your score since it’ll appear as a new account on the report.
However, you can improve the score by utilizing a small portion of the credit. If you take out more money from the line, you run the risk of ruining your score due to high credit utilization.
You should also strive to make on-time payments, otherwise, your score will take a hit.
Types of Credit Lines
Credit lines come in two distinct categories. Secured and unsecured. The former doesn’t need any security thus making it an uphill task to qualify for one. When you do qualify, prepare for the high-interest rates due to the high risks involved.
With a secured credit line, the borrower needs to secure the loan with an asset such as a car or a home. It’s a risky move, but the lender will offer lower interest rates since they have a way to recoup their money if you default payment.
Now that you have an idea of the different types of LOCs, you can use them to your advantage. Here’s how to do it.
A Personal Line of Credit
If you have a checking account with a certain lending institution, you can use it to take out a personal credit line. With this, you can transfer funds into your checking account while also allowing you to issue checks for various payments from the LOC.
You’ll also benefit from the freedom to use the funds at whatever time you please since it works in the same manner as a credit card. Keep in mind the amount borrowed is secured against an asset. If you fail to pay back, the lender will move in to repossess the property.
A Business Credit Line
After starting and running your business for a while, you’ll need to expand to reach a wider audience in order to increase revenues and grow the brand. Financing is a major enabler of this process and a business LOC is a great choice.
You can use this money to purchase inventory, equipment and hire more staff. If you have a new business, chances are consistent cash flow is a huge problem. To maintain consistency, you can use a business LOC which will also take care of fluctuating costs.
Since it’s a secured loan, it means you have to put up collateral. In this case, business assets such as inventory and equipment will work as security.
Home Equity Line of Credit
As the name suggests, you can use this credit line to fund home renovations, emergency fixes and other repairs. Your home’s value will act as collateral when taking out this loan. However, the lender will offer low interest rates and fees since the risks are low.
If you intend on taking out a HELOC, use the same lender where you have a mortgage. Furthermore, there’s a certain duration which you can draw the money and it can last for up to 10 years before the lender seeks the whole payment.
A credit line is of the less advertised funding options. If you’re in a cash crunch, you can take advantage of its low interest rates which will save you money in the long run. While this funding option seems like a cheap one, it may not be the best option for everyone.
To choose the best funding option, you have to analyze your current financial situation. This will give you a true position which can then help you to seek the best option. This means borrowing what you can afford and choosing a loan with low costs.
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.
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While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.