What is a Personal Line Of Credit?
Posted by MoneyKey
on June 3, 2015
When you need quick cash there are many options available. Traditional methods include going to a bank and applying for a loan, using credit cards with high-interest rates, finding a payday lender, or even borrowing money from family or friends. One of the most overlooked options for borrowing money is through the use of a personal line of credit, which is now available from more than just banks and other major financial institutions.
Who uses a Line of Credit?
Lines of credits are most often used by small business as a way to meet their capital needs, but borrowing money through a line of credit
as an individual has never been particularly popular. This is probably due to the fact that the big banks don’t frequently advertise personal lines of credit like they do with other methods of borrowing. This leaves you with little to no information on lines of credit and what it takes to get approved.
How is a Line of Credit different?
Lines of credit can often be confused with traditional loans, but there are important differences. With a loan, you will borrow money for a specific amount of time then make payments until the loan is paid off in full. A personal line of credit, on the other hand, is open-ended with specific limits on how much can be used. Unlike a credit card, a line of credit can be accessed directly.
Interest payments are based on the amount used on the credit line and principal payments can be made in an immediate lump sum or over a specific period of time. This makes lines of credit a more versatile and lenient option.
Applying for a Line of Credit
There are some factors that come into play when applying for a line of credit. A lender will look into current income and ability to repay. A person’s lifestyle and employment history are sometimes taken into consideration as well. The financial institution being used to acquire the line of credit will set the interest rate by adding an indexed percentage rate, such as the lowest possible interest rate a bank can allow, to a margin amount. This margin amount will be affected by credit history, profitability, risk, and the borrower’s ability to repay.
When to use a Line of Credit
Lines of credit are incredibly useful for businesses and people who face larger recurring costs over the span of a year or more. Credit cards come with high-interest rates, making them a dangerous option if you are planning to make large purchases while unsure of the specific timeline you will be able to repay. Lines of credit are becoming an increasingly popular choice for people wanting to take the smallest possible financial risk, so visit our main MoneyKey
website to look into the many options available online today to see what’s best for you.