Less than half (41%) of Americans could not cover a
$1,000 emergency
with their savings. This is unsurprising as the cost of living
continues to rise without significant changes in wages.
If you are part of the majority that could not cover an
emergency of this size, a line of credit may help. If you
already have a few lines of credit and wonder,
how many lines of credit should you have?
Don't worry. This guide will cover all of your questions and
help you understand the different types of lines of credit.
What Is a Line of Credit?
A line of credit (LOC) is a type of
revolving credit
that customers can use to get funds. The maximum loan amount,
interest rates, payment sizes, and withdrawal amount gets
determined by the lender.
You'll have access to the funds in a line of credit if you
don't go over the limit and meet any requirements necessary.
One of the significant factors is making your minimum payments
on time.
Types of Lines of Credit
There are different types of lines of credit that have various
benefits. The general advantages of each line of credit are
flexibility, including flexible payment and financial safety.
LOCs are flexible because you can request any amount up to
your limit without drawing the entire amount. You'll only pay
interest on the amount you draw out, not the total available
amount.
If you continue to meet your minimum payment requirements, you
can adjust how much you pay, making the repayment schedule
flexible. You can pay off your whole balance or only keep up
with the minimum.
As a general rule, you should pay as much off as you can at
one time. A line of credit also works as a financial safety
net if you run into trouble because of unforeseen
circumstances. Until your next paycheck, you can cover the
unexpected expenses with a line of credit.
The different lines of credit are personal, home equity,
business, secured, and unsecured.
Personal Lines Of Credit
Personal lines of credit
allow a borrower to repay the funds on a revolving basis. When
applying for this type of credit, a lender will check your
current credit score.
To qualify for a line of credit with CASH 1 Loans, you'll
need:
- To be a resident of the state where you apply
- To be 18 Years of Age or Older
- To have an Open Checking Account
- To have Proof of Income
- Not to be on Active Duty in Military
A personal line of credit is used when you face an emergency
issue. If you need something dealt with right away but don't
have the necessary funds, you'll likely opt for a personal
line of credit.
Home Equity Lines Of Credit
Home equity lines of credit (HELOC) is a form of available
secured credit because you'll offer your house as collateral.
Your available credit gets determined by the amount of equity
in your home.
You can borrow as much as you need up to that available limit.
The maximum is usually around 80% of what your home is valued
at, minus how much you currently owe on the mortgage
(otherwise known as equity).
After the draw period is over, the balance you used is due,
and repayment begins. You'll typically have ten years or less
before reaching the draw period.
There are some additional costs to getting a HELOC. For
example, the cost of getting your home appraised is factored
in.
This line of credit is best used for large expenses or to
consolidate debt that you already have with high interest
rates. Many opt for this line of credit to help with debt
because of the low interest rates and tax benefits.
The line of credit is only tax-deductible on the interest
paid. HELOC money must also improve, build, or purchase the
home up for collateral to be tax-deductible.
Business Lines Of Credit
A business line of credit is used for businesses. Shocker,
right? Instead of taking out a separate high-interest loan, a
business owner can borrow money when needed through a line of
credit. The lender bases the amount given on the profitability
of the business.
A lender will also check the market value of the business and
any risks to determine specific loan details. Business owners
can benefit by taking out money when they need it without
getting approval from the lender.
This line of credit is flexible in the world of business. You
can use it on inventory, equipment, services, or any other
business expense.
Secured vs. Unsecured Lines of Credit
Chances are, you already have a form of secured or unsecured
line of credit. The differences are as follows:
Secured Credit
To receive a secured line of credit, you must offer up
collateral. A typical example of these loans is a car or home
loan. If you fail to make payments and cover your debt, the
lender has the right to seize the asset you put up for
collateral.
These loans have lower interest rates and higher amounts than
unsecured LOCs because it is less risky for the lender. This
is their way of securing payment in advance.
Unsecured Credit
Most lines of credit are unsecured, meaning you don't offer up
any collateral to the lender. Since this is a risk for the
lender, they will make interest rates higher.
Credit cards are the most common type of unsecured line of
credit. Your
credit limit
is how much you can borrow. You'll only pay interest on the
amount you use.
A lender cannot take anything from you as collateral if you
fail to make payments on a credit card or another unsecured
line of credit. However, your credit score will start to
decrease.
Open-End vs. Closed-End Credit
The different lines of credit will fall into one of two
categories; open-end/revolving credit or closed-end credit.
They differ in the following ways:
Open-End/Revolving Credit
Open-end/revolving credit lets a borrower take out amounts
during the draw period. They can make payments throughout the
life of the loan. Credit cards, HELOCs, and personal lines of
credit are all great examples of an open-ended credit product.
When an amount of available credit gets withdrawn and repaid,
the money is available to borrow again.
Because of this, an open-ended credit line is mainly used to
fund needs that cost a lot of money over a long-term time
frame. This line of credit has its advantages, but keeping the
product open may come with fees.
Closed-End Credit
Otherwise known as an
installment loan, a closed-end line of credit allows the borrower to get a
specific lump sum amount. This is used for something that
needs payment upfront.
Many use it for a specific purpose, making it less flexible
than an open-end credit. Money gets disbursed in a lump sum
and cannot be drawn out again even after repayment.
Money is lent for a specific amount of time before repayment
begins. Repayment is made through regular, scheduled payments,
not all at once. The borrower will also pay the principal and
interest at this time.
What Would You Need a Line of Credit for?
There are many instances where you may need or find a line of
credit useful. Below are some circumstances where you could
use your line of credit wisely.
Car Repair
When you need an auto repair but don't have the means to pay
for it yourself, a line of credit can help. Emergency car
repairs can be unexpectedly expensive.
If you rely on your vehicle to get to work every day, you'll
want to fix the problem as soon as possible. You can use a
line of credit in this instance by taking out a
personal loan
or applying for a new credit card.
Unexpected Utility Bill
Unexpected utility bills come as a shock to people that don't
have money saved up to cover them. If your utility bills
change every month, this occurrence may happen to you.
To pay off the expenses with a low interest rate, you can take
out a line of credit. There is no reason to get penalized for
not paying a bill when you have this option available.
Appliance Repair
An appliance issue can make your daily life more complicated.
It's best to get these fixed right away.
The most
common appliance repairs
homeowners need are stovetop repairs, refrigerator repairs,
oven repairs, etc. If you don't have enough room in your
budget to pay for these necessary repairs, get a line of
credit.
Fees For Your Child's Schooling
If your kids are on their way to college, you'll have to
figure out how to pay for it. You may have saved up for this
moment for years, but with the increasing schooling costs, you
still might not have enough.
With a line of credit, you can take a lump sum out to cover
the necessary schooling costs. You won't have to begin
repayment until your child graduates from school.
Unexpected Dental Work
Whether you have a tooth that's been bothering you for years,
or you slipped and knocked a tooth out, a line of credit can
cover the dental costs. Even with insurance, you may have to
pay out-of-pocket fees for dental work.
Veterinarian Bill
If your pet needs immediate surgery or has to take a visit to
the vet because they are sick, your insurance won't cover the
cost. Instead, use a line of credit to cover the bill all at
once.
Understanding the Different Lines of Credit
Navigating the answer to how many lines of credit you should
have doesn't have to be complicated. As long as you educate
yourself on each type and read the fine print, you'll be in
good hands. Using a line of credit is a great way to pay off
unexpected occurrences, remodel or rebuild your home, cover
business expenses, and boost your credit score.
If a traditional bank has denied you a line of credit, all
hope is not lost. Apply online in
Idaho,
Kansas, Missouri,
Louisiana
or
Utah
with CASH 1 Loans to get approved for a line of credit in
minutes.