A personal line of credit is a product that may play a leading role in financial planning when you have an unexpected expense. One of the most important things to know about credit lines is that they are loans, despite similarities to credit cards.
Because lines of credit are unsecured loans, a good credit score is helpful. The reason why you apply for this product doesn’t matter to the lender as much as whether you are likely to repay it.
Read to learn more about how these credit products work.
How Does a Personal Line of Credit Work?
These credit lines have many similarities to credit cards. Your income level, as well as credit score and history, are the greatest factors to keep in mind.
Amounts that borrowers may have available when approved will depend on the three previously named factors. Although a high amount may seem attractive, one of the things to consider is your ability to eventually repay.
Doing your homework to find the best rate is a good idea. Sometimes low-interest rates come with high annual fees.
Some examples of things that people often take out lines of credit for include:
- Trips or experiences likely to be a once-in-a-lifetime event
- Consolidating consumer debt like credit cards into one payment
- Increasing your cash flow if you have an irregular income, like many freelancers or people in similar professions have
- Larger projects like extensive home renovations or remodeling
- Urgent expenses like medical bills, car repairs, or roof and plumbing disasters
How Do You Get It?
Many consider a personal line of credit a superior alternative to credit cards. Access to your cash is not confined to a single purpose. One of the advantages of this lending product is being able to borrow incrementally, repay the funds, and keep borrowing as long as your line lasts. You’ll usually pay interest on what you borrow, instead of installment payment.
Some important matters that you will want to discuss with the lender include:
- What type of income level or credit score is necessary?
- What is the size credit line recommended for your needs?
- How do you get the process started?
Figure Out How Much You Need to Take Out on Your Line of Credit
Lenders consider your risk level when deciding how much money to let you have. Personal credit lines are at higher risk because of their unsecured status. Lenders often charge higher interest rates because of this risk.
Making your credit rating look as attractive as possible is essential. Remember, the better your rating and the lower your risk, the more you may be able to borrow.
What Documentation Will You Need for Your Credit Line?
A line of credit will require:
- Information on income from a job or business
- Any benefits payments that you receive
- Your Driver’s License or other government-issued ID
How Does a Line of Credit Differ from Other Lending Products?
Lines of credit are different from other lending products, such as credit cards, home equity lines of credit, and payday loans. Here are some of these key differences:
- Credit lines have lower interest rates and higher limits than most credit cards
- Home equity lines of credit are secured against your home, allowing you to lose your home if you default
- Payday loans offer very high-interest rates, coupled with a short repayment period
When you are considering a credit product, few things offer as much flexibility as credit lines. Giving one of these products careful consideration will be a wise choice. If you are interested in a personal line of credit, contact us to find out more about what options are available to you.