What Is a Line of Credit?
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What is a Line of Credit?
A credit line works as a credit card does: You only use the amount you’ll need, and pay interest only for the amount you spend.
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The term “line of credit” refers to a loan that you can use as credit cards. You can borrow a certain amount, but draw only what you require and pay only interest on the amount you use. This is different from a loan one that you pay back in full with interest over a predetermined term.
How does a line of credit function?
For personal credit lines the lender will preapprove you for a specific amount. The funds are used over time as needed, and you pay the interest only on the amount that you use and not the total amount.
Lines of credit requirements differ based on the type and lender, but borrowers with good or excellent credit (690 or more on the FICO scale) have better chances of being approved with the lowest rates that are available. Personal credit lines tend to have lower interest rates than credit cards, however, the rates are typically fluctuating, which means they may fluctuate.
Bank customers may hold an open line of credit to pay for emergencies or to provide an overdraft insurance on their account with a checking institution.
The majority of lines of credit come with two phases:
Draw period: Once approved for a line of credit and you’re now in the draw period, and you can use the funds as often as you’d like. In this period you’re required to make minimum monthly payments or interest-only installments, depending upon the lending institution. Certain lenders provide credit lines that allow continuous draw periods you are able to leave open.
Repayment period: Once a predetermined amount of time, your credit line becomes repaid and you cannot take money out.
Unsecured in comparison to. secure lines of credit
Lines of credit that are not secured Personal lines of credit generally are secured. That means the lender uses only information about you — your credit as well as income and outstanding debts, for instance — to determine if you qualify for a line of credit. This information can also affect the amount you are granted and the percentage rate you receive.
Secured lines of Credit: The ability to secure a credit line that is secured by collateral can help you qualify or get an interest rate that is lower. An example is a secured credit line, in which your home is used as collateral for the borrowed funds. Small businesses may utilize their inventory or properties as collateral for a secured . The lender may take possession of your property if you are unable to repay.
Compare personal lines of credit such as credit cards, personal loans
Personal lines of credit
Credit cards
Personal loans
Approximate APR range
7%-20%.
11.99%-24.99%.
5.99%-35.99%.
Amount of loan
Lender decides your credit limit.
Lender decides your credit limit.
$1,000-$100,000.
How do you get a loan
When it is needed.
As needed.
Lump sum.
Repayment conditions
The amount of money you pay depends on the lender.
Continuous.
1-7 years.
Monthly payment
Variable.
Variable.
Fixed.
Annual fees
Some.
Some.
No.
Credit types
Revolving.
Revolving.
Installment.
Credit lines for personal use
Personal lines of credit are most commonly offered by credit unions and smaller banks, but certain large banks offer them. Credit lines may be offered at rates ranging from 7 to 20% and are wildly different. A credit line may also have an annual fee, which you generally have to pay no matter if you utilize the funds.
A majority of lenders provide an online application, but small financial institutions may need the help of a telephone call to begin.
They work best when: A line of credit will allow you to access funds for unexpected expenses. They can also be useful in ongoing projects that have variable costs and timelines for projects like business or home construction projects.
Credit cards
Credit cards are typically issued by banks or credit unions. The typical APR for credit cards ranges from 11.99 percent to 24.99%. It is common to apply for a credit card online and receive the card within seven to 10 business days after approval.
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When they work best credit cards are designed to be used for daily use. You can use them for gas or food items or purchase furniture or to pay for repairs to your car. It’s a best practice to keep your balance at or less than 30%, which is why credit cards shouldn’t be used for spending that is higher than that threshold.
Personal loans
Personal loans can come from a credit union or online lender. These loans tend to be non-secure and are offered at rates of 5.99% and 35.99 percent.
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You are able to typically apply get a personal loan online to preview possible rates as well as loan amounts. Most lenders will approve your loan within a day or two and then pay your loan in one lump sum within a few days after approval. Repayments toward your loan usually begin the following month.
They are most effective when: A personal loan is an option for large or one-time expenses such as the repair of a roof, or for .
Check if you are pre-qualified for a personal loan without impacting your credit score
Just answer a few questions to get an estimate of your personal rate from a variety of lenders.
How a line impacts your credit score
The process of applying for a personal line of credit will likely result in your credit score taking a drop. This is usually an occasional drop of just some points.
Beyond that, the hinges are heavily on repayments. In time payments on the credit lines with revolving options can strengthen your credit, but late payments could hurt your score, so borrow only when you’ve got a plan to repay it.
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Closing the account may cause a rise in the credit utilization of your account and adversely affect the credit rating. If you are planning to replace your credit line, be strategic about the process. For example, if you’ve recently applied for credit and haven’t waited a while as a lot of consecutive credit applications can lower scores.
About the author: Annie Millerbernd is an individual loans writer. Her work has appeared on The Associated Press and USA Today.
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