A personal line of credit is similar to how a credit card works. The lending institutions provide approval for the full amount, however, you pay up interest for the used portion.
A personal line of credit is wonderfully helpful when you need to make payments in installments. This could be done for an important work project which needs timely partial payments. This will considerably help to manage to overdraw your dedicated bank account, especially when you have non-uniform income payments. This is specific to using the auto-debit option and land into an unexpected bill amount.
Basic Requirements for a Personal Line of Credit
Here, a home equity line of credit requires collateral or security whereas a personal line of credit is devoid of any such commitments. This is purely based on your credit score and performance. All you would need is a high score of over 650 or more.
How a personal line of credit works?
The lending institution approves your desired sum of money in advance. Like a typical loan, you do not have to use up the entire amount. Funds are transferred over to the savings account and used as and when need falls upon you.
This is how the interest is applied to the loan amount utilized, not the full amount. The interest rates keep fluctuating and are dependent on market factors. Sometimes, this line of credit has a corresponding annual fee, irrespective of how you use the available funds.
It is upto the borrower to compare the interest rates in contrast to the credit cards. It is always better to have thorough market research before making a choice. Most information is available online for a pre-informed decision.
Read More: Pros & Cons of Personal Loan
Repayments are similar to how it works with a credit card, where we make repayments on spot. With a credit card, there’s no set repayment, rather a bare minimum. In case of a personal line of credit, there’s a minimum withdrawal period and then repayment follows.
A personal line of credit can fall upon you in a rather difficult proposition, it becomes like a revolving credit for a long. This can hurt your credit scores in the long run!
How is a personal line of credit different from other forms?
A personal line of credit is different from a conventional loan type, where you do not have repayments over a set timeline. Every loan shows differently on the credit score. If you’re already hell-bent on the loan amount you may need, then a personal loan is a much better option to consider over a personal line of credit. Obviously, a personal line of credit is unsecured so nothing is kept under seize, meaning no security is required. This is exactly why we prime credit scores for a personal line of credit. It can easily vary between 500-800 for different lending institutions.
Advantages of a personal line of credit
- You save the interest component that you would have paid on the full amount.
- If you have erratic income payments, then a personal line of credit is way better over other credit forms.
- Interest rates are much lower than personal loan interest rates.
- This is considered as an emergency source of funds.
- Since it’s possible to transact through a cheque, substantial control can be applied to the expenditure and spending.