Personal Line of Credit – The Next Big Thing in Finance

Saturday, October 3, 2020, 6:00 AM | Leave Comment

A personal line of credit closely resembles a credit card. It allows you to draw funds up to a certain limit.

This unsecured revolving line of credit can be used for any purpose, any time, and as needed.

You can spend the money for whatever you want, in whatever amounts you wish, as long as you don’t go beyond your approved line of credit.

Let’s understand a bit more about personal lines of credit.

Loan vs. Line of Credit

Loans and lines of credit have a few distinct differences. Personal lines of credit tend to have a higher interest rate because they pose a greater risk for the lender.

A personal line of credit is similar to a credit card; both are revolving credit lines with interest getting accumulated on the unpaid balance. You can use as much as you need up to your credit limit, and you need to make small payments until it’s paid off.

The loan, on the other hand, offers the full amount at one go. You are then expected to pay off the loan in monthly installments over a certain loan tenure.

The biggest advantage a line of credit has over a regular loan is that interest is charged only on the used amount and not on the approved credit limit.

Types of LOCs

Secured Vs. Unsecured Lines of Credit

A secured line of credit uses collateral to “secure” the loan. In the event of default, the lender can seize the collateral and sell it to recover the losses. Secured credit lines are low-risk for the lenders, and hence the interest rate is low, and loan terms are more favourable.

Some advantages of secured line of credit:

  • Higher credit limit

  • Low-interest rate

Some disadvantages of secured Line of Credit

  • Needs collateral

  • If you fail to repay, the lender can seize the collateral

  • Higher risk of getting into debt because of the higher credit limit

On the other hand, an unsecured line of credit doesn’t need any collateral. This means the lender takes a high risk to offer you the money. If you stop making payments, the lender has limited options to recover the losses.

Some advantages of unsecured lines of credit:

  • No collateral needed

  • Open-ended, with no expiration

  • Disadvantages of unsecured lines of credit

  • High-interest rate

  • Lower borrowing limit

Revolving vs. Non-Revolving Personal Lines of Credit

Revolving and non-revolving lines of credit are very similar, but they have a few distinct differences.

Here are a few of them:

  • Interest Rates

  • Usually, a non-revolving line of credit has a lower interest rate than revolving lines of credit.

  • Borrowing Limitations

    Both revolving and non-revolving lines of credit allow you to withdraw as many times as you want up to your approved credit limit. The difference lies in what happens next when your credit limit is reached. The revolving line of credit gets replenished as soon as you start paying back the borrowed amount.

    On the other hand, a non-revolving line of credit does not get replenished. The account gets closed as soon as the credit limit is exhausted.

  • Borrowing Amount

    Non-revolving lines of credit are usually offered with larger borrowing limits than non-revolving credit lines. Borrowing limits may vary from lender to lender and depends on various factors such as credit score and repayment capacity.

  • Maintaining Your Account

    A revolving line of credit remains open for a lifetime as long as you keep making repayments. You can dip into these funds whenever you want it. Thus, it becomes a great tool in case of emergencies. However, a non-revolving credit line account is closed once the funds are used. If you ever need the money again, you need to fill out another application to get a new credit line.

Advantages of Using a Personal LOC

  • Borrow only what you need

  • Interest payable only on the money borrowed

  • Flexible repayment options

  • 24/7 access to funds

  • Lower interest rate than credit cards

  • Unsecured line of credit- no need for collateral

  • Freedom to use the money however you want

  • Ideal for long-term, ongoing projects where the final costs are not fixed

  • Ideal for bridging temporary cash shortfalls

  • Can withdraw up to 100% of credit limit without any restrictions

How to Apply for a Line of Credit

To get a line of credit, you need to apply for a credit line at a lender (bank or financial institution). The lender will review your loan application and assess your creditworthiness based on your credit history and repayment capacity. For your personal line to be approved, your lender should see you as a creditworthy, low-risk borrower.

Before you apply for a personal line of credit, you should consider taking these steps:

  1. Review your credit report

    Check your credit report with all major credit bureaus to ensure your credit report is free of any errors, and your credit score is good enough to get you the best loan offer.

  2. Prepare your documents

    Lenders will look at your age, income, employment, residence, and other factors that can affect your ability or willingness to repay the loan. Make sure you keep your documents ready and in order.

  3. Compare interest rates and other loan terms

    Before you decide on the lender, make sure you do your research and compare rates and terms (repayment schedules, fees, etc.) of multiple loans offers from various lenders.

Authour Bio:

Lily Tran is a content writer, working for MoneyTap, who writes about all things Finance. Her passion for credit, debt, loan & investment drives her to help readers get an insight about everyday finance.

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