A line of credit is a credit source extended to you by a financial institution, a bank, a business or by any other institution. It can be in the form of a traditional revolving credit card account, term loan, demand loan, special purpose loan or any other form. You can readily tap into the source of funds, anytime. You will only pay interest on the actual amount of money you draw from the fund, although some banks or financing institutions may require you to pay an annual fee on the unused line.
A line of credit can be secured by collateral or not, depending on the terms of the loan agreement. To get approved for a line of credit; you need to pass the creditworthiness requirements of the lender. So, it is important to present your credit score, tax returns, proof of income and other financials that could prove your ability to repay the loan. Some financial institutions does not require the usual paperwork, so even if you have a bad credit and irregular source of income, you can still enjoy its line of credit. Personal line of credit refers to your credit limit – or the maximum amount of credit you are allowed to take.
Business line of credit
Do you need a line of credit for your business? It is quite analogous to the personal line of credit. The lender will grant you an access to a definite amount of financing. You will not pay interest on the line of credit until you tap into the funds. It is often secured by receivables or inventory, and the lender may also decide on other forms of collateral. But, it can be unsecured too, depending on the lender. You can repeatedly tap into your lines of credit. It is revolving, in a sense that if your line of credit is $50,000, and you take out $30,000, you still have access to the remaining $20,000. If you pay back the $30,000, you can access the entire $50,000 without reapplying for a new line of credit.
What is the main advantage of a line of credit compared to other types of loan?
If you want to borrow money anytime from a pool of available money, then get a line of credit. When a lender approves your application, you automatically get the ability to spend the entire amount of money. But, you don’t actually pay interest until you access it. So, if you have a line of credit worth $50,000, and you decided to take $10,000-then you only pay interest on that amount, and not on the entire $50,000.
Credit Card Lines of Credit
A credit card and a line of credit are so much alike. Actually, your credit card works as a line of credit. You can borrow up to a maximum limit on your card, and you can repay it and re-borrow money many times.
When are the Draw periods and the Repayment Periods?
Just like any other loan, you have to take note of the draw period as well as the repayment period of your credit line. The draw period refers to the dates that you borrowed money and used your line of credit, which can take up to 10 years, just like a credit card. The repayment period refers to the time wherein you have to repay the principal plus the interest on the loan.
Do I have to pay the closing costs?
Yes, in most cases, lines of credit also have closing costs. So, whenever you apply for this type of loan, factor these in choosing the loan products and lenders.
When is it practical to take out lines of credit?
If you have a bad credit, many banks and financial institutions will not be so interested in underwriting your personal loans-especially unsecured ones. It is also very costly to take out a loan every now and then. Of course, there’s the fact that you have to re-apply and repay the loan several times, and the cycle of borrowing and repaying goes on and on. By taking out lines of credit, you can get a specified amount of money whenever you need it.
In a nutshell, here are the pros of getting a line of credit:
- It is convenient and flexible.
A line of credit is one of the most flexible ways to borrow money. You can use it for medical fees, child’s education, home renovations, and paying off high-interest credit cards and other debts. If you need money for your daily needs, you can use it like any normal credit card. In fact, the lender does not care how you spend it. So, you no longer have to worry about showing proof of use when applying for it. The best part is that you don’t even have to reapply every time you borrow money. As long as you still have access to the line of credit, you can repay and borrow without having to apply for a new line of credit.
- Convenient access
You don’t have to fall in line in a bank’s queue. You can access your credit through online banking or ATM.
- Pay interest only on the amount of money you use
You only have to pay interest on the amount you used. You can pay down the amount you borrowed and continue to access the remaining credit available to you.
- There is no need for you to re-apply
You only apply once for your credit limit that you can use and re-use.
- Enjoy a flexible repayment schedule
You don’t have to repay the entire loan at one time. You only need to pay the minimum amount required so you can borrow again. If you have spare money, you have the freedom to pay off as much as you want without worrying about pre-payment penalties.
- Save money on high interest debt
You can use your line of credit to consolidate your high interest debt. By getting a new low interest rate line of credit, you could lower payments on several debts.
Enjoy the best line of credit from ALC Commercial today. Contact us now!