A line of credit refers to flexible funds which can be used for anything – vehicle purchases, home renovations, consolidating debt, or other kinds of spending. Offered by a financial institution, a line of credit has a lower rate of interest as opposed to your credit card, making this option attractive to people with credit card debt. Lines of credit can be appealing, and when used the right way, they can make investments and the purchase of business equipment simple. However, lines of credit also have their disadvantages if one is unprepared for them.
Pros
- One of the greatest importance of a line of credit is the availability of funds at any time. With this option, you don’t require an approval process because all you have to do is borrow from an existing line.
- The good thing about lines of credit is that they can be asset secured to ensure lower interest rates. As opposed to the credit cards which are not always secured, the lines of credit may be secured depending on the real estate, equipment, inventory, or any other assets.
- In most cases, the lines of credits are sought out because of their flexible nature. While the business loan requires you to begin paying interest right away, the line of credit only allows you to pay interest based on the amount used. Therefore, you don’t have to worry about paying back large sums of money since a line of credit makes it possible for you to pay back only what is used.
- The lines of credit can be secured depending on various factors. While your credit score is still a vital indicator of your creditworthiness, you could still be approved for a line of credit by having collateral, and this could result in a lower rate of interest.
Cons
- Unlike a loan, a line of credit often has variable interest rates, implying that the rate of interest may change from one month to the other.
- You have an access to funds throughout out: sounds good but it’s scary. Most financial institutions advertise the possibilities and limits with which you can access funds on your mobile, online, or through the ATM. If you have difficulties with credit and you love to spend, then a line of credit could be your greatest nightmare.
- There’s a possibility of racking up serious debt. With a loan, your lender ascertains the amount you require upfront and this amount goes towards the intended purpose only. However, with a line of credit, you can access funds whenever you want and even spend it how you want, irrespective of whether or not you are spending smart.
- You can pay your lines of credit at a lower interest rate, but most people who do that end up maxing out their credit, resulting in further financial stress.
If you are planning to take a line of credit, it is important to weigh the pros and cons to determine if that is what you require. What’s important is ensuring you have a proper plan of paying it back, as well as a date to pay back your credit.
