Personal Line of Credit
A Rainy-Day Fund for Now – Or for Later
Ideally, everyone would have a bunch of money set aside for a rainy day – an emergency fund that, as all the experts advise, could be tapped into when the car breaks down or an unexpected medical bill pops up.
Unfortunately, that’s not the case for most. If you happen to be one of these people who would love to be prepared, but may not have the money saved up right now, having a personal line of credit can be a great alternative to help relieve the pressure of unexpected expenses.
A personal line of credit can act as a flexible ‘safety net’ you can fall back on for access to funds when you need it. You can make a draw now for an immediate expense or wait until a rainy day when you are short on funds to cover an emergency expense.
There is sometimes confusion between lines of credit and installment loans because both types of loans are paid back over time. While an installment loan is closed-end (i.e. it is made available to the consumer as a one-time lump sum) with a set repayment period, a line of credit is open-end (i.e. allows a consumer to draw additional funds at any time as long as they still have available credit) and doesn’t have a set repayment timeframe.
Unlike a payday loan or installment loan, a personal line of credit is similar to a credit card in that you get access to an approved amount of credit without having to apply again each time you need access to credit. Once approved, you can borrow as much as you want up to your available credit because a line of credit is a ‘revolving credit‘. This means that the borrower can spend the money, pay it back and spend it again, in a revolving cycle.
To be more specific, a personal line of credit is a loan that allows you to spend up to a certain limit. They can range anywhere from $200 to $500,000 or more, depending on factors such as your credit score, your income, whether or not you can offer up other things of value like a home or car to “secure” the loan, and what demands you already have on your money for things like car payments, mortgage payments and other loans.
Basically, a personal line of credit is an open-ended loan, meaning you do not have to use the whole amount at once, and then you can pay any amount as long as it is above the required minimum payment. You can keep an outstanding balance, but you do have to make regular payments, which may include fees as well as applicable interest and some of the original amount of money you borrowed.
You can check your balance or make additional payments towards your outstanding principal balance at any time by contacting your loan provider by phone or email. The legally permissible terms of a line of credit vary depending on the state in which the line of credit is offered. Be sure to check the state-specific fee and/or interest structure of the product offered by a lender as they may have multiple products if they operate in multiple states.
When should you use a personal line of credit?
With so many loan types available, it may be difficult to decide what kind of loan makes sense for you. A personal line of credit is ideal for anyone who wants to prepare for unexpected expenses by ensuring they will have access to a small safety net of funds at any time.
It’s important to remember to use your personal line of credit responsibly and only borrow the funds you require, as you will be charged interest and/or fees on any amount you withdraw. It should be thought of as a back-up option to cover your needs, not extra money to buy the things you want.
To be sure, if you incur an emergency expense that needs to be covered immediately, but will not need ongoing attention, and you do not want to carry a balance, you may be better off applying for a payday loan and paying the money back immediately with your next paycheck. However, it is important to do your research and decide which loan option will fit your situation.
If you do decide that a personal line of credit is the best option for you, these are the typical minimum requirements to apply for one in the United States:
- You must be 18 years of age or older;
- You must be a US citizen or Permanent Resident;
- You must be living in the state where you are applying for the line of credit;
- You must have an active bank account to accept the money into and to make the payments from;
- You must be able to prove that you have a regular source of income;
- The loan provider must be able to reach you, meaning that you must have a valid contact number and an active email address;
If you meet all of the above requirements and are interested in a line of credit, you can apply for one online, by phone, or in person, depending on which loan provider you utilize
However, if you would like to talk through the steps, by phone or in person may be the best option for you.
When you apply for a personal line of credit, a lender also looks at your credit history. They will evaluate how much money you make, how secure and sustainable your job and lifestyle are, and how you’ve paid your past debts
This is why it’s important to understand the difference between a secure and unsecured credit line.
Many assume that you will also need some form of collateral, like a house or a car, to apply for a personal line of credit. This is true in the case of a secured credit line – as the collateral acts as the ‘security,’ but in most cases personal lines of credit are unsecured loans.
An unsecured personal credit line means that the borrower does provide any property or other collateral as a condition for the loan. For unsecured credit, a lender will likely ask for references as part of your loan application to ensure they have alternate ways to obtain your contact information.
It’s important to go over all the details of your personal line of credit so that you understand what rates and terms apply to you before agreeing to it.
A line of credit is a great tool because it ensures you have funds available today, and tomorrow. Unlike a regular loan, you don’t start paying interest charges until you use it, allowing you more control.
The main advantage of a line of credit is its flexibility. Borrowers can tailor how much they borrow at any given time to their needs, and will only have to pay interest on the amount borrowed, not on the entire approved credit limit. In addition, consumers can also adjust their payments as needed based on their budget instead of being tied to a loan with a fixed end date. Borrowers can repay the entire outstanding balance at once, or choose to just make the minimum payment and repay the remainder when they are able to.
If you are approved for a line of credit, it can be a lifesaver in a time of need. Although a line of credit is convenient, it’s important to remember that any amount you draw will incur fees and/or interest so draws should be made primarily for short-term/emergency expenses – you should never treat a line of credit as additional cash to be spend on wants.