When one finds themselves in need of a loan, there are a few options available. You can either go to a bank and apply for a traditional loan with a fixed rate, or turn to pawnshops or payday lenders. One of the lesser known options is a line of credit. Lines of credit have been used mainly by businesses to meet working capital needs or take advantage of an investment opportunity, but have caught on much less with individuals. This may be due to the fact that banks don’t often advertise lines of credit, and potential borrowers don’t think to ask.
A line of credit is basically a flexible loan from a bank or financial institution. It is similar to a credit card, offering you a limited amount of funds for you to utilize any way you wish, a line of credit is a limited amount of money that you can access as needed and repay immediately over an agreed upon term. Though for an individual who required the occasional additional fund between paycheck, a line of credit is the cheaper solution. A line of credit comes with lower interest rates and a more flexible repayment schedule than credit cards.
Lines of credit are not meant to fund one time purchases such as a car or a house, but are intended to smooth out the vagaries of variable monthly income or finance projects for businesses where the amount needed upfront might be difficult to determine.
Though there are some similarities between lines of credit and payday loans, what really makes a difference is that for anyone who can qualify for a line of credit, the cost of funds will be dramatically lower than for a payday loan. The credit evaluation process is much simpler and less demanding (and sometimes may not be required at all) and the process is quicker. Payday lenders tend to lend smaller amounts than those often approved in lines of credit.
Lines of credit are like any financial product, they can be good if used properly, excessive borrowing against a line of credit can get you into financial trouble. If used properly you can not only maintain financial stability, but you can also improve your credit along the way.