What is a line of credit and how does it work?

Maybe you’re considering changing the looks of your house, or maybe your son has finally graduated high-school and now needs extra financial help from you. There are thousands of financial reasons that would push you to consider a loan or a consumer debt, but have you ever considered a line of credit?

It’s not as popular as car loans and other consumer debts, but a line of credit is still the answer to all your needs, it’s the one decision that is keeping you away from tackling all your costs and living comfortably.

What is a line of credit?

A line of credit enables you to borrow money when you’re unable to pay your costs for yourself. You’re able to draw the money up to a predetermined limit whenever you need it.

Once you’re accepted, you can draw it, like a credit card, and can borrow once and again until you reach your credit limit, without worrying about reapplying.

Aside from having very low interest rates, you can spend your money on whatever you like.

How do lines of credit work?

It’s easy to understand once you get a grasp of the concept, line of credits offers you a limited loan which you can draw at any time. You can use the money however you like but once you reach the limit you won’t be able to draw the money until the limit is refreshed.

To set up this line of credit, all you have to do is go over to any financial institution like a bank and ask for it. A credit limit will be given to you in addition to a rate of interest. If you’re approved, then you’re free to draw the money which you can access whenever and wherever.

According to a recent Credit Sesame review, for every line of credit there are two periods, “draw period” and “repayment period”. If you’re in the draw period then you’re still free to spend money the way you like, one you’re in the repayment period you’ll have to start paying the loan back with an interest.

How to use a line of credit

If you’re thinking about opting for a line of credit, then it is better if you’ve got actual financial struggles that you want help with. This way you’ll be sure that you’ll be spending your money only on important things. Here is a list of why you might want to consider a line of credit:

? For investment
? For college/education
? Pay for home renovations
? For an emergency fund
? To repair a vehicle or to buy one

Types of line of credit

There are two types of LOCs, secured and unsecured.

Secured line of credit: in this one, the borrower has to put something valuable as collateral to get the loan, an example of that would be a house. When you offer collateral, lenders tend to trust you more as a borrower and will be confident that they’ll get their money back if you stop paying them back by putting the item on sale.

Because of this, lenders will offer low interest rates because secured lines are more trustworthy.

Unsecured line of credit: Borrowers don’t have to put collateral to qualify for the loan, which makes this one very hard to get. That is why unsecured lines of credits are most likely taken by students or for personal reasons.

Line of credit vs loan

A loan is a specific amount of money that the borrower needs to help pay for a specific thing. Be it a car, some furniture etc.… The interest rate is calculated considering the full amount and the borrower will choose whether they want to pay their debt monthly or weekly. Once you pay your debt you can’t borrow the funds unless you reapply for the loan again.

A line of credit on the other hand, is an open contract; you can always borrow, pay for it, and borrow again, and the interest is calculated on how much you’ve spent from the credit and not from the limit they’ve set for you.

Tips for using a line of credit

Applying for a line of credit is a serious decision, it has its pros and cons too which is why you should check your credit scores and find ways to boost your credit health so you can qualify for any credit or loan you ask for.

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