What is a Credit Line?
There are different types of credit products available in the market. In addition to the traditional loans, consumers can use credit lines.
These are much more flexible to use, but all of their pros and cons have to be evaluated carefully.
The simplest way to understand a credit line is as a pool of money that stays in a particular account. You can use the money whenever it is necessary. At the same time, the money is not yours. When you use it, you will actually borrow it.
The lines of credit are among the most popular credit products in the market at present. They are many different options to pick from. There are credit lines for personal use and for business use as well. Before you opt for such a product, you must know exactly what to expect.
Credit Line Basics
With this type of credit product, you will have a set amount of money available to you. You will be able to borrow as much money as you need at any time as long as you do not exceed the set maximum limit. You can borrow a small amount today and a different amount tomorrow. You will enjoy a good amount of flexibility.
The differences between a traditional loan and a line of credit are clear. With a traditional loan, you get to borrow a fixed amount of money at once. You cannot borrow more whenever you need extra money. Once you have taken out the whole amount, you begin its repayment almost instantly. Typically, the first instalment is due the next month. As you make monthly loan instalments, you pay off a portion of the initial borrowed amount (the principal) plus interest. In this way, the loan is amortised as time passes.
With a credit line, you have the opportunity to borrow the whole amount of money available to you, but you are not obliged to do so. With a loan, you have to take out all the money at once.
Credit Line Uses
The main advantage of these credit products is their flexibility. You can borrow the amount of money that you require at any time without going through the hassle of applying for another loan. This is convenient and cost-efficient as well. Besides, the line of credit can be very useful in case of a financial emergency.
If your house requires emergency repairs, for instance, you can readily write a check against your credit line to pay for these repairs. The cash is instantly available and no time is wasted. You will still owe interest, but the quick reaction will help you with damage control and can save you money at the end of the day. When you do not need the money for anything, it will simply stay there. You will not have to assume any kind of obligation.
You will find a credit line to be quite helpful for the management of your monthly budget. You can readily cover unexpected expenses and other costs which exceed your monthly budget without having to use a loan. Similarly, you will avoid checking account overdrafts which can be quite expensive.
These credit products are perhaps best used as emergency backups. They are not recommended for daily use. You should avoid using them to pay for food or other daily expenses. Similarly, they are not suitable for financing bigger projects and purchases and for borrowing in the long term. This is because you have to pay a fee every time when you withdraw cash. Additionally, the interest rates on the lines of credit are higher than those on most personal loans and especially the ones on secured loans such as car loans and mortgages.
Another thing to note about credit lines is that the lenders have great control over them. The banks typically reserve their right to cancel these products at any time and to reduce the maximum limits at their own discretion. This leaves consumers in a somewhat vulnerable position. This is because the credit line which you rely on in emergency may not be there to help you out when you need it.
Obtaining a Credit Line
It is quite easy to apply for a line of credit. You have to make a single application that is similar to the applications for loans. The lender will take into account all major factors determining your financial situation in order to decide whether to extend the credit line. These factors include credit history, income and any asset which you offer as security.
One unique type of credit line is the home equity line of credit. It enables you to use the equity which you own in your house as collateral. Basically, you will be borrowing against the equity which you own in your home. In this case, you can take out a large amount of money, especially if you have repaid most of your mortgage loan. Since your property will act as surety, the interest rate will be much lower. Still, if you do not repay what you borrow plus interest in a prompt way, you will risk losing your home.
There are also unsecured lines of credit available. They are more difficult to qualify for because there is a higher risk for the lender. In order to get approved, you will need a clean credit record and a stable employment income. You can expect the interest rate on an unsecured credit line to be higher than that on a secured one.
A credit line can be highly useful for dealing with financial emergencies as long as the repayment of the borrowed money is affordable to you.