Some people really benefit from a line of credit loan. Other people do not.
How can you find out which of those people you are? You need to think about your situation carefully. Why do you need a loan, what will that loan be used for, and will you be able to pay that loan off?
Take a look at this complete line of credit guide and find out if this is a reasonable choice for you.
What Is a Line of Credit Loan?
A line of credit loan is kind of like having a second credit card.You get a certain amount of money approved by the lender at the same time, but you don’t have to use all of it when you get it.
Instead, you can draw from the fund gradually as you need it. You also only pay interest on the amount you have used, not on the entire amount altogether.
Most lines of credit loans have an annual fee that you must pay, regardless of whether you’ve used any of the money or not.
What Do Interest Rates Look Like?
In some cases, interest rates on a line of credit could be lower than the interest rate for your credit cards. It depends on where you get your line of credit. Some lenders offer interest rates as low as 7.25%.
You shouldn’t rush into getting a line of credit. Take your time. Look around at the different lender options. Finding the best deal for your needs could save you a lot of money.
What Other Payments Are Involved?
Aside from the interest rates, all your paying for is the money you’ve borrowed and a small annual fee.
Becuase you can use or not use your credit line whenever you want, one payment could look completely different from another. You only pay back what you borrow when you borrow it.
As for the annual fee, that also depends on what lender you choose. It will probably be around $25 or 1% of the balanced owed. Part of looking for a line of credit is asking about the annual fee.
How Much Can I Borrow?
Again, it depends on where you get your line of credit. Some lenders will only let you borrow $25,000 but others will go well over $100,000.
How Do I Qualify for a Line of Credit Loan?
Line of credit loans are unsecured loans, meaning they don’t have any collateral, so you have to have a strong credit history to qualify for one. This means you have a strong credit score and can show that you will be able to pay off the loan in the future.
You’ll most likely need a credit score of at least 680, though some lenders may off the loan to people with a slightly lower score.
You may be required to say what you plan to use the loan for, but some places may not ask at all. But be prepared to explain why you’re getting the line of credit when you sit down with a lender.
Why Would I Need a Line of Credit Loan?
There are several different reasons you could get a line of credit loan. Because they are so flexible, they are helpful in a lot of different circumstances. They are best for people who have borrowing needs that are constantly changing.
When You Need to Borrow Money but Aren’t Sure How Much
Think about something like a wedding. You know you’ll need extra money to get the wedding all set up, but you don’t know exactly what that number will be.
A line of credit opens the doors to a large number of funds, but if you don’t use them all, you only have to pay back what you used. This can save you a lot of money if you aren’t sure how much you will need to borrow for a specific event or project.
If you know you have money coming in but don’t have it in time to pay the bills, a line of credit could be a good option. It lets you pay the bills while you’re waiting for your paycheck, and once you get it, you can use your paycheck to pay back the loan.
A line of credit is a good option to have set aside for emergency funds. If something does come up, you have a large amount of money you can draw from so you don’t have to worry about finding the money somewhere else yourself.
Paying Other Expenses
This could be things like tax bills or other one time payments.
When Should I Avoid a Line of Credit Loan?
Though line of credit loans are helpful in some circumstances, they are not for everyone. There are times when you should use other loan options instead.
Paying Student Loans
There are a lot of tight federal regulations when it comes to student loans, and if you tell your lender you want a line of credit to pay them off, they probably won’t approve you.
When You Need a Large Sum of Money at Once
If you need a big chunk of money, you may want to look into other loan options, like a personal loan. If you want to pay off a lot of debt at one time, taking out a personal loan will be much more helpful than getting a line of credit.
If You Struggle With Debt
If an open fund of money is too tempting, you shouldn’t get a line of credit. People already struggling with a lot of debt probably won’t find a line of credit very useful, and they may have a hard time paying it off and end up with more debt.
Unless you can be responsible with the fund, you should not get a line of credit.
Is a Line of Credit Loan Right for You?
Take some time to think about this before choosing a line of credit. There are other funding options that might work better for your situation. If you do decide to get a line of credit, shop around first. Find a lender that will meet your needs and give you the best deal.
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