Learn About Lines of Credit

Lines of credit are useful ways for residents to access funds. A line of credit allows users to spend a certain amount of funds and pay them back on their own terms. These funds are provided by a bank or other lending institution.

They approved applicants for a set amount of credit for person use. This amount can be from several hundred dollars to thousands of dollars. Borrowers can use as much within their line of credit as they want during their “draw period.” It is during this period that borrows can take money from their credit line. However, users are charged an interest rate on their borrowed funds until they are paid back.

Lines of credit can be useful and valuable for residents who want flexible access to funds. A line of credit can be helpful when borrowers have upcoming expenses. A credit line can be compared to a credit card. Both allow users to cover major expenses in their lives. A line of credit allows borrows to take out cash up-front. They will also have great flexibility in their repayment plan. Furthermore, they typically offer greater security than credit cards and lower interest rates. In addition, a line of credit usually has low to no annual fees which makes them more accessible and cheaper.

What are the purposes of a Line of Credit?

There a various reasons that residents seek a line of credit. In contrast to a personal loan, a line of credit does not have a maximum set amount and can be used for projects that do not have fixed amount or deadlines. They are ideal for residents who do not know how much a project will cost or how long it will last. The flexibility of a line of credit will be useful for these types of borrowers. A line of credit can be used for:

  • Home improvement projects.
  • Emergency medical expenses.
  • Higher education costs.

There are situations and circumstances in which a line of credit is not the ideal financial decision. For instance, residents who do not have regular incomes may have a hard time making payments in the future. In addition, those who are borrowing funds from a line of credit for small expenses such as food and monthly bills may also have trouble later on.

A line of credit should only be used if a borrower is certain that he or she will be able to pay it in full when necessary. Unpaid lines of credit can severely damage a resident’s credit score. Sometimes, lenders will seize collateral if payments cannot be made. This collateral can be a borrower’s home or the funds in their savings account.

Borrowers should read the fine print of their terms of agreement. They may find different fees and terms depending on the institution. For example, some lenders request “balloon payments” at the end of the draw period. A balloon payment is a return of the entire unpaid balance. Borrowers whose terms include a balloon payment must be able to pay back the entire cost immediately after the draw period. They must make sure to have the assets to do so.

Learn About Secured versus Unsecured Lines of Credit

Borrowers can obtain other a secured or unsecured line of credit from a lender. A secure line of credit is one in which a borrower puts down some form of collateral. Collateral can be many things such as a certificate of deposit or savings account. However, the value of the borrower’s home can also be considered collateral.

A home equity line of credit, a HELOC, uses the value of a home a collateral against a borrower’s line of credit. Banks and other lending institutions usually allow residents to open a line of credit that is worth up to 85 percent of the value of their home. Borrowers should be aware of the significant risk of opening a HELOC if they are not able to repay their credit. Their home can be seized by their lender if they fail to pay on time or keep up with their interest.

While a secured line of credit comes with increased risk, it also comes with lower interest rates. This way, borrowers will not have to pay back as much as those who borrowed on an unsecured line of credit. Furthermore, the drawing period for a secured line of credit is much longer. A secured line of credit draw period is 10 to 20 years.

On the other hand, an unsecured line of credit does not involve collateral. However, it has higher interest rates as lenders view these loans as a greater risk than secured lines of credit. Moreover, the total line of credit may be smaller than what a lending institution would issue for a secure line of credit. In addition, they have shorter drawing period. They are typically three to five years instead of 10 to 20 years.

How to Obtain a Line of Credit

Residents who want to obtain a line of credit should first check their credit scores. In order to get a line of credit, borrowers must have a qualifying credit score. Those with a low credit score may be denied a line of credit or be accepted with a higher interest rate. Prospective borrowers with low credit scores can take steps to improve their scores. This can be accomplished with by regularly using finances and paying off debts before applying for a line of credit. On the other hand, residents who have good or excellent credit scores can apply for a line of credit without much worry. Furthermore, lending institutions will examine an applicant’s debt-to-income ratio and history of borrowing when deciding the amount of credit to lend.

Most residents can apply for a line of credit with an institution online. Applicants will need to provide certain pieces of information when applying. They will need to supply their contact information, level of income, employment, desired line of credit and how long they need the line of credit for.

Prospective borrowers should see which lending institution has the best annual percentage rate (APR) before choosing one. Usually, an APR less than 4.5 percent will be awarded to those with an excellent credit score. However, some lenders have interest rates that are more than 10 percent.

After residents choose their lender, they can fill out and submit their application. Lending institutions typically provide an answer soon afterward. Approved applicants are sometimes asked to come in to the office to finalize the process. Then, they may open their line of credit and begin using funds.

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