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A
line of credit is a pre-established amount of
credit extended to a borrower by a lender that the
borrower can draw against as needed. There usually
aren’t any rules that dictate how the borrower can
or should use the line of credit however the line
should never be used frivolously. An individual
can apply for and receive a line of credit and so
can a business.
There are several ways a line of credit differs
from a loan. First of all, the line of credit
application process is simpler and approval
usually takes days rather than weeks. When you
obtain a loan, you are given a lump sum of money.
With a line of credit, you have a maximum amount
of money (or credit) available to you, but you use
only what you need.
If you max out your line of credit, you start
paying down the principle and that amount becomes
available to use again. You can continue this
spending and repayment cycle until the
pre-negotiated term on the line of credit expires.
With a loan, repayment is made in installments
meaning that you’ll make equal monthly payments
throughout the entire loan term. With a line of
credit, you have more flexibility in how much you
repay each month. Sometimes, you may only be
required to repay the interest each month.
It’s a good idea to put some thought into why you
need a line of credit. Many need the funds to make
home improvements so they apply for a home equity
line of credit. Those who issue home equity lines
typically set them up as secured meaning that the
equity in the home is used as collateral. Having
collateral reduces the risk to the lender and
usually means more favorable terms. A business
owner might rely on the line of credit to help
make it through slow times during the year or to
purchase necessary equipment.
If you decide to apply for a line of credit,
you’ll be making a smart move if you shop around.
You’ll find different
interest rates and repayment schedules being
offered by lenders. Some lines of credit need to
be secured while others don’t. As a general rule,
the better your
credit history, the more favorable the terms
you’ll be offered.
Also consider finding out about any line of credit
being offered at the financial institution where
you conduct your personal or business banking. As
an established customer, you might get better
terms and an expedited application process.
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