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When
you need cash, is it better to obtain a
line of credit
or get a loan? The answer depends mainly upon your
self discipline and what you plan on using the
money for. If you want to make fixed payments over
a specific period of time, then a traditional loan
is your best option. If you prefer to have a line
of credit that you can use whenever you need to as
long as you have money available, then a line of
credit is probably the route you want to take.
Loans work in the same manner as a home mortgage
for the most part. You borrow a specific amount
and you make monthly payments for ten to thirty
years. Many people will opt for a
fixed rate
loan when they borrow money to start a business or
improve their home. You can borrow from your fixed
rate loan one time. That means, even if you've
paid back half of the loan, you cannot simply call
the loan lender and ask to re-borrow the half
you've paid back. You use it, you lose it!
On the other hand, a line of credit is much more
flexible and allows you to do just that.
Basically, whatever your maximum line of credit
is, that's how much you can borrow by writing a
check, and in any amount up to that total. So if
you have a line of credit for $30,000, you can
write checks for $1600, $2000, $8000, or more- as
long as the total amount of money you use is less
than $30,000. Then, as you start making payments
on the amount of money you've used from your line
of credit, you can immediately reuse that money
again. Many people who are unsure of how much
money they are going to need, or know they will
need irregular amounts will often select a line of
credit. A line of credit is a good option for
college tuition, buying a new car, or just knowing
you have access to cash when it's needed.
Somewhere between a line of credit and a fixed
rate loan is a home-equity line. For most
home-equity lines, the loan period is actually
divided into two different segments. The first is
called a "draw" period, and lasts about five
years. During this period of time, you are able to
borrow money as you need, similar to a line of
credit. As you make payments during the "draw"
period, the amount of credit available to you is
increased by the amount of your payment. When the
draw period of your home-equity line ends, you
will either be required to pay back all of the
outstanding balance in a single, lump sum, or you
will pay the outstanding balance back over a fixed
period, with fixed payments just as you would a
regular loan. Your contract will include the
details for what happens during the "payback"
period of your home-equity line- and are things
you should understand before you sign the papers
for the money.
In addition to the convenience of having these
extra funds for whatever you need the money for,
in some cases, you can deduct some or all of the
amount of the loan or line of credit on your
taxes. If you are improving or purchasing your
home, you can deduct up to $1 million dollars!
Basically, the government will subsidize the cost
of borrowing the money if you use your home to
secure the loan. If you pay $770 in interest and
you can deduct that in the 27% income bracket, the
federal government is going to pay about $200 of
that interest. In some states, you can also claim
the interest on your state tax returns, and
increase the amount of your deduction.
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