A line of credit can be very useful as it can help you finance a business that you plan on starting or manage on-going expenses. Although a personal line of credit can be a great way to deal with your expenses, it also comes with its own pitfalls.
Understanding the line of credit
A line of credit is a predetermined loan. This loan allows you to spend up to a certain amount. You don’t have to pay interest charges on this loan until you decide to use it. You can decide how much you want to use from the line of credit. You are allowed to pay back the amount as long as you are making the minimum monthly payments set by your lender. Minimum payments may be a combination of interest and principal or interest only.
Getting the line of credit
Lines of credit are offered through various banks and credit unions. The procedure is quite simple and often one can apply online. Also, most banks offer an overdraft protection on chequing or savings accounts. This automatically becomes the line of credit for you. This comes into use when your account drops to below zero. If that happens, your bank covers the payment and charges you with interest. A fee is also charged for using the overdraft. If you directly go for the line of credit, then you can avoid the fee and the rate of interest will also be lower.
Types of lines of credit
Lines of credit are usually of two types: unsecured and secured. A secured line of credit is backed by GICs or the equity in your house. Since this lowers the risk to the bank, you get a lower interest rate with lower monthly payments and a significantly higher limit. This can save you hundreds a year if you plan to use a significant amount of credit.
Understanding the limit
A line of credit is always accompanied with a limit as to how much you can spend. The limit is decided on a variety of different factors. These factors include your credit score, your income, if it is secured or not, your other outstanding financial obligations, like car payments, mortgage payments and other loans.
Interest
Lines of credit carry much lower interest than most credit cards available in the market. Keep in mind that the rates are variable. What this implies is that the rates float with the bank’s prime rate. This can be worrisome if you end up running a big balance when the interests are low as they can cause you trouble later when the interests sky rocket.
Insurance
Purchasing a line of credit insurance can be of great use in case of an unwarranted injury or death. A percentage of your outstanding balance can be used to purchase insurance. Insurance can be purchased as a percentage of your outstanding balance. This amounts to just a few dollars a month. To get insurance on your line of credit, contact your lender. You can also get this from outside sources.
A line of credit can be very helpful for business persons as well as people who need to meet their expenses. At the same time, it is important to understand the limits of a line of credit. It is not advisable to splurge on things that are not essential or to treat it like a source of income. If you are not careful with your line of credit, you will find yourself caught in a debt spiral. If you want to discuss more on the issue you can get in touch with us at Prowse Chowne.