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How To Use A Line Of Credit And Make The Most Out Of It

Learning how to use a line of credit will allow you to take advantage of it to its full potential. Needless to say, knowing how to use it properly will protect you from making regretful decisions in the future.

how to use a line of credit

In a report published by Experian, it says that “consumer debt in the U.S. has grown 19% since 2009 to its current record high of $14.1 trillion.” Furthermore, it says that while debt in aggregate increased, the same happened to the totals in almost every debt category — with some doubling even.

Based on the same report, mortgage loans remain to be on top of the list with an all-time high record of $9.6 trillion. Next on the list are auto loans, student loans (which doubled in number), as well as credit card debt, and home equity lines of credit (which is a type of line of credit) with balances total to $420 billion. Following on the list are personal loans and retail credit card debt.

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Although compared to other debt types, the report says that “HELOCs have increased by at least double-digit percentages in the past decade.

There could be a lot of reasons or factors to consider for the increase, but one thing’s for sure, more and more people are getting lines of credit. We thought, perhaps one of the reasons why is the fact that a line of credit has a lower interest as compared to credit cards, which is its major competitor as they function almost the same. Another reason could be the flexibility, as well as the fact that like personal loans, you can basically use it for almost anything.

While there are so many reasons to like about lines of credit, we highly recommend that before you even get into one, you better learn and understand how it actually works, and how to effectively use it.

As borrowers, it is our responsibility (we owe it to ourselves, anyway) to be knowledgeable about things (in this case, about lines of credit) before we even get into it — After all, the last thing we want is to get into trouble or to regret our decisions, right?

So, if you want to know more about the line of credit and how to use a line of credit, then this one’s for you.

In particular, we are going to share with you some of the most asked questions regarding lines of credit, which include the following:

  • What is a personal line of credit?
  • How does a line of credit work?
  • What are the different types of lines of credit?
  • How to use a line of credit?
  • How to apply for a line of credit?
  • Where to get a line of credit?

WHAT IS A LINE OF CREDIT?

A line of credit or simply a line of credit refers to a type of loan that is similar to a credit card in the sense that a borrower has a specific loan amount of money that is comparable to a credit card limit. That money can be used for any purpose, as needed.

Similar to personal loans, generally, lines of credit are unsecured, which means a borrower does not need collateral to get one. However, just like any other unsecured loans, most likely a borrower must have at least 700 credit scores plus a good history of repaying debts to ensure approval.

Just like personal loans and credit cards, a line of credit can be used for almost anything like home renovations, vacation, purchasing expensive furniture, as well as paying for medical bills and educational fees.

While you can spend your line of credit for almost anything you want, it is important to note that you must not exceed the approved line of credit or you might just be in trouble paying the loan off.

A line of credit, like any other type of loan, does have its share of highs and lows. It has its own set of risks, which could really end up costing a good amount of money if not handled well. Meanwhile, one of the major good things about it is that borrowers do not get charged for any unused amount.

HOW DOES A LINE OF CREDIT WORK?

Now that you already know what a line of credit is all about, let’s talk about how it actually works.

Unlike a typical loan or other types of loans, a line of credit gives borrowers access to a set amount of money that they can borrow or use when the need arises. What is good about is that you do not pay any interest until the borrower actually uses the money.

Lines of credit are available both for personal and business use, which makes it also a good choice among business owners when they need some financial backup.

With regards to personal lines of credit though, they are usually unsecured. As mentioned earlier, unsecured loans mean collateral is not needed to ensure the approval of the loan. However, having a good or excellent credit score is required.

Depending on the lending company, some lines of credit come with fees like annual fees, and there are limitations set when it comes to the amount of money you can borrow.

Once you have qualified for a line of credit, what happens is that you will have a set time frame, which is also known as “draw period”. During this time, you can draw money from the account. The draw period can last up to several years depending on the lender.

Again, depending on the lending company or financial institution, you may be issued with special checks or a card to use, or the company may transfer the money you need to your checking account once you are ready to borrow money. It’s best to check with your desired lending company first before getting one.

Moreover, as mentioned, you won’t be charged for any interest until you actually borrow money from your line of credit. Once you did, the interest will begin to accrue, and you will then have to pay at least the minimum payments required. Once you pay, the amount will be added back to your line of credit.

However, once your draw period ends, you will have to enter the repayment period, which means you will have a set time to repay the remaining balance.

While making payment at a minimum looks like a good option, please know that you actually are paying more by doing so. Thus, we highly recommend paying off what you need to pay off in time to avoid wasting money.

WHAT ARE THE DIFFERENT TYPES OF LINES OF CREDIT?

Before we even talk about how to use a line of credit, another important thing that you should know is the different types of lines of credit.

Yes, there are a few of them, which include:

  • Personal Lines of Credit
  • Business Lines of Credit
  • Home Equity Line of Credit (HELOC)

Now, allow us to tell you more about each type —

Personal Lines of Credit

Personal lines of credit basically allow any individual borrowers to use the money for any personal expenses like big purchases, home repairs, vacation, medical bills, weddings, and other significant life events, and others. A personal line of credit may also be used to consolidate higher-interest debts.

If you want to learn how to use a personal line of credit per se, here’s a very informative video by MonkeySee:

Business Lines of Credit

Obviously, this type of line of credit is designed for businesses. A business line of credit can be useful to get a business off the ground. This can be used to fund business-related expenses like paying vendors, payroll, paying tax bills, as well as in purchasing inventory.

A line of credit may also be helpful for those businesses that are just starting out as it can be used to create a more consistent cash flow, which can cover unexpected expenses.

Home Equity Line of Credit (HELOC)

HELOC is actually a popular type of line of credit especially for those whose home is worth more than their mortgage.

Unlike personal lines of credit though, HELOC is secured. Your home automatically becomes collateral. Since it is a secured loan, the line of credit is usually higher, and the interest rates lower. Also, borrowers may also gain tax benefits if HELOC is used to fund home improvements.

HOW TO USE A LINE OF CREDIT?

While we can run down a long list of how to use a line of credit, we’d rather provide you with some of the most significant tips on how you can make the most out of this type of financing.

First, plan ahead of time. As part of the planning process, you must see to it that the money you will get from a line of credit will only be used for significant purchases. Do not get a line of credit for small purchases. It’s not worth it. Instead of a line of credit, better use your savings for small purchases.

Second, shop and compare. We thought this one’s a very important tip. When opting to use a line of credit for certain expenses, make sure to shop around first and compare before settling for a specific lender. Doing so will allow you to choose the best deal possible.

Third, know and understand the terms of the agreement. When we say terms of the agreement, this includes knowing and understanding draw periods, when you have access to the money, as well as making interest-only payments.

Lastly, make early payments as much as possible. By making early payments, you get to cut down on future interest payments. But of course, ideally, you pay off whatever amount you used as soon as you can. That way, you can save a couple of bucks as compared to just paying the interest or the minimum amount required.

HOW TO APPLY FOR A LINE OF CREDIT?

Similar to other types of loans, to be able to get a line of credit, you have to look for a lending company or financial institution that fits best your requirements, and then, apply.

As usual, prior to giving approval for a line of credit, the lending company will assess and examine your creditworthiness. Generally, this will be based on your credit history, as well as your income.

Just like in any other type of loan, proving your creditworthiness is the most crucial part, but if you do have a really good record, plus you have a stable job with a good income, then, this should not bother you at all.

As soon as the lender gets to assess that you are worthy of a line of credit approval, then, funds will immediately be released (the number of days that will take before you receive the funds will depend on the lender).

Meanwhile, while preparing your application for a line of credit, consider taking the following steps to ensure approval of your loan application:

  • Review your credit report with all major credit bureaus through AnnualCreditReport.com.
  • Make sure to complete and/or update your financial record including your taxes, mortgage payments, etc. Also, make sure you have all your licenses as well as permits, and if you are registered correctly with both the local and federal governments.
  • Compare rates and other important loan details among lenders to ensure you get the best rate possible.

WHERE TO GET A LINE OF CREDIT?

At this point, you already know what a line of credit is, how it works, what you need to get approved of it, and of course, how to use a line of credit.

The next thing you need is where to actually apply for a line of credit.

One thing’s for sure – there are a lot of options out there. There are a lot of lenders providing a line of credit options.

Today, though, we are going to provide you with some of the industry’s best. This includes:

  • Wells Fargo
  • SunTrust
  • Bank of America
  • OnDeck
  • Navy Federal

Wells Fargo

Wells Fargo is one of the most popular banks in the country. Yes, it does offer lines of credit along with its other loan products.

At Wells Fargo, the bank provides lines of credit amounting from $3,000 up to $100,000, which makes it ideal for borrowers who need more line of credit.

When it comes to rates, the bank has very competitive rates that range from 9.50% up to 21% APR. Based on the record, at least 15% of the bank’s approved applicants qualify for the lowest rate available.

While the bank does not charge a balance transfer fee or cash advance fee, it does charge borrowers with a $25 annual fee.

If interested, you may apply online and get a reply soonest.

SunTrust

SunTrust is also a very popular financial institution in the country, and yes, they do offer a revolving line of credit, too.

At SunTrust, they provide a line of credit that amounts up to $250,000, and can even go as high as $500,000 for Private Wealth Management clients.

The lending company does not require collateral, and it does not charge application or annual fees as well.

However, the borrower must meet the minimum asset requirements, which amounts to at least $100,000.

Furthermore, SunTrust gives a 0.25% interest rate discount to those who pay through automatic deduction from a SunTrust account.

Similar to Wells Fargo, interested applicants may apply for a line of credit online, too. Expect that a decision is made within just a few minutes.

Bank of America

Bank of America is actually the best choice when it comes to HELOCs. The bank offers a low and very competitive home equity line of credit plus it provides several other benefits to borrowers.

The bank offers a special intro APR at only 1.74% for the first 12 months. Eventually, the rate increases to 3.65%, which still is very competitive.

Furthermore, Bank of America does not charge application, annual and closing fees, or any other additional costs as if a borrower wants to convert a variable-rate balance to a fixed-rate loan.

Also included among the perks it provides is that once an initial withdrawal is made when you open your account, you will automatically get a 0.10% discount for every $10,000 withdrawn.

OnDeck

OnDeck line of credit is ideal for small businesses. The lending company charges APR that starts from 10.99%, and borrowers can apply for a line of credit that could go as high as $100,000.

Such amount is very flexible and could cover various small business financing needs, which include bridging short-term cash flow setbacks, as well as financing growth opportunities.

Furthermore, what’s nice about OnDeck’s line of credit is that it does not charge any fees. More so, the company’s online application process may be done in as fast as 10 minutes.

Navy Federal

One thing we like about Navy Federal Credit Union is the fact that it allows HELOC borrowers to borrow money up to 95% of their property’s equity with a 20-year draw period, and a 20-year repayment period.

Navy Federal, similar to other lending companies in our list, does not charge any origination, application, annual, or inactivity fees as well.

Another thing to like about Navy Federal HELOC is that it offers a 0.25% rate reduction for borrowers who opt for automatic payments. Furthermore, the credit union will also handle most of the closing costs, which include settlement, notary fees, as well as a title search.

FINAL THOUGHTS ON HOW TO USE A LINE OF CREDIT

When it comes to financing needs, there is no such thing as one size fits all. That is why there are a lot of options available out there.

Line of credit, in particular, though is a good option if a borrower is going through challenging times – struggling in paying off bills, as well as a short-term dip in income. It is also ideal for those who have small businesses and need funds to help keep it going, to finance improvements, or even to start anew.

The line of credit is very flexible compared to other types of loans. It can be used for almost any purpose. Needless to say, it only accrues interest for the amount used.

Is it the right one for you? Well, if your needs fall under what we have discussed, then, the answer could be a yes.

Just keep in mind the tips we share on how to use a line of credit and you will surely be guided to ensure you do not use this type of loan for the wrong reasons.

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5 Best Payday Loan Alternatives That Offer Lower Rates

While payday loans can be very accessible especially during financial emergencies, the rates can get really overwhelming. Thus, we are going to share with you some of the best payday loan alternatives to help you get through with immediate financial needs.

best payday loan alternative

In a report published by the Economic Research of the Federal Reserve Bank of St. Louis, it says that there are as many as 12 million American people who use payday loan every year.

In the same report, it says that collectively, American borrowers spend as much as “$9 billion every year on payday loan fees“. Furthermore, it states that “On average, the fee for a payday loan is $55 for a two-week loan, and the typical $375 loan will incur $520 in fees because of repeat borrowing.

If you come to think about it, the numbers are huge! Well, it is huge! That is why it is important for borrowers to fully understand first what they are getting themselves into (in this case a payday loan) before getting into it.

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While payday loans can be very helpful especially when you badly need cash, the thing is, it hurts. Paying it off hurts.

So, with that in mind, we thought of providing several other options in lieu of a payday loan. These choices are definitely low in terms of rates and charges, which is ideal especially if it’s an emergency situation and you do not have enough resources to pay off a huge loan (huge because of charges and fees).

But, before we give you our list of some of the best payday loan alternative, we are going to share with you first a couple of important information about the payday loan so you get to fully understand why a payday loan can get a little dangerous rather scary.

In particular, we are going to give answers to the following commonly asked questions:

  • What is a payday loan?
  • How does a payday loan works?
  • How much does payday loan charges?

WHAT IS A PAYDAY LOAN?

We keep saying this every time we make reviews on banks, credit unions, and other lending companies. Borrowers, it is your responsibility to research and knows more about the products and services, as well as the companies that you are dealing with. This is to avoid regretting anything in the future.

As borrowers, we owe it to ourselves to research and know our options before we sign any loan documents. Make it a point to shop around and compare products and services, as well as the corresponding features to ensure you get to land on the best deal possible.

Now, at this point, we are going to talk about what a payday loan is all about.

According to Economic Research of the Federal Reserve Bank of St. Loius, payday loans are defined as follows:

It is a type of alternative financial service that provides fast cash to cover emergency situations or help pay a borrower’s expenses from one paycheck to the next. These unsecured loans have a short repayment period and are appropriately called “payday loans” because the duration of a loan usually matches the borrower’s payday schedule. A balloon payment—full amount of the loan plus fees—is generally due on the borrower’s next payday after the loan is made.”

Furthermore, it says that normally, payday loans amount to $500 or less. Also, it usually comes due within two to four weeks after the borrower has received the loan.

It is also important to note that the loan terms vary depending on the borrower’s pay schedule or how many times he or she received his or her income, which means, the terms could be a week, two weeks, or in some cases in a month.

With the strong presence of technology and the internet, over the years lending companies have already offered payday loans online as well, which makes it even more accessible to borrowers anytime and anywhere they may be.

By the way, as mentioned, a payday loan is an unsecured loan (like most personal loans are), which means a borrower needs not any collateral to be able to borrow money from a lending company or a financial institution.

HOW DOES A PAYDAY LOAN WORKS?

So, now you already know what a payday loan is all about. This time, let’s talk about how it actually works.

Since payday loans are unsecured loans (needless to say, they are easily accessible kind of loan), which means lending companies do not require collateral, borrowers must expect high levels of interest.

Payday loans are considered as predatory loans because of having such a reputation for charging extremely high interest as well as added fees.

Generally, payday loan providers are small credit merchants. They usually come with physical locations where borrowers can apply and at the same time, get an approval of the loan. However, with the advent of technology, some payday loan services are already available online through online lenders.

To be able to apply for a payday loan, borrowers must be able to provide paystubs or pay slips coming from their employers, which shows their current levels of income.

Normally, payday lenders base the loan principal on a percentage of the borrower’s predicted short-term income. In some cases, though, lenders also look into the borrower’s credit score, as well as his or her credit history, which means a hard credit pull will be conducted during the loan application process that could affect the borrower’s credit score.

By the way, before you even look for a payday lender, make sure that your state allows it. In the United States, as of 2020, there are 12 states already as well as the District of Columbia that have banned payday loans. The 12 states are composed of Arkansas, Arizona, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, North Carolina, Vermont, and West Virginia.

HOW MUCH DOES PAYDAY LOAN CHARGES?

Borrowers, you better read this. Of all the details about payday loans, this probably is the most important of all.

We have already mentioned that payday loans charge high-interest rates or we better say extremely high-interest rates.

For your reference, payday lenders can charge up to 500% in annual percentage yield (APR). Although most states have usury laws that limit interest charges for up to approximately 35%, when it comes to payday lenders, they fall under exemptions. Thus, they get to charge more.

Payday loans are regulated and governed by individual states. However, some states outlaw payday loans of any kind, which means borrowers need to be very careful.

BEST PAYDAY LOAN ALTERNATIVES

Let’s face it. Sometimes we are caught in unexpected situations when we badly need cash but do not have enough. Thus, some of us resort to getting payday loans even if the interests are high just to be able to get through.

The thing is – there are actually a lot of other options around where you can borrow money and have the funds just when you need it.

Now, before we move on to our list of best payday loan alternatives, here’s a video of what MagnifyMoney suggests. We thought you should check this out.

Having said that, here are five best payday loan alternative borrowers must look into:

  • Credit Cards
  • Paycheck Advance
  • 401(k) Loan
  • Family and/or Friends
  • Fast Personal Loans

CREDIT CARDS

First on our list of best alternatives for a payday loan is a credit card. Compared to payday loans, credit cards have much lower interest rates and APR. Furthermore, credit cards have added flexibility, which can be very helpful among borrowers.

Usually, when you get a payday loan, if you have excess money, regardless if you still need it or not, you still have to pay for it. As with credit cards, you only pay the amount you borrow.

If in case you badly need cash, you can also avail a credit card cash advance. Although this option can be quite expensive, it definitely is much cheaper as compared to how much you are going to pay if you go for a payday loan.

In most cases, issuers charge a percentage of the advance as a fee, which is normally around 5%, with a minimum of $5 up to $10.

When opting for this option though, the key is to pay off the advance right away. Otherwise, the balance may just get out of control, which is something that you surely would not like, right?

Also, please take note that when you cash advance using your credit card, the interest would usually begin accruing right away, which is not the case when you use it for purchases or balance transfers.

PAYCHECK ADVANCE

Another possible option instead of getting a payday loan is an advance on your paycheck — that, of course, will depend on your company.

Unfortunately, not all companies offer these types of loans. While for those who do, the terms usually vary from one company to another.

To be sure, before you even think about getting a loan elsewhere, check your company first if they offer paycheck advance, and of course, make sure to check the terms as well.

As we always say, it is important to know the details to avoid any surprises. While surprises are usually exciting that is not the case when it comes to money matters, in this case, a loan.

401(K) LOAN

When everything else fails, you may also consider taking a 401(k) loan. Ideally, you should not take anything from your retirement account, but if worse comes to worst, then a 401(k) loan is a valid choice.

The thing about borrowing against your 401(k) is that it does not incur any taxes for as long as you follow all the rules. The rules include repaying the loan as scheduled or in full if you resign from your current employer.

Furthermore, 401(k) loans do not require any credit check. Also, when you pay for the loan, you pay interest back to your own account. Not bad, right?

The key when it comes to 401(k) loan is that you pay off the loan within the year. The sooner, the better so it would only have very minimal impact on your account.

The downside of this though is that your employer may not allow you to make new contributions until you are able to repay the loan, which can affect the progress of your retirement fund.

CREDIT UNIONS

Another best payday loan alternative is borrowing money from credit unions. Credit unions do usually offer lower interest rates among their members. Needless to say, they are open to both borrowers with unattractive and excellent credit scores.

However, to be able to borrow money from credit unions, you have to first and foremost, be a member of the union. Otherwise, you won’t be able to avail of any of the products and services it offers.

Now, how to qualify for a payday alternative loan?

In addition to the information we have already provided, as a borrower, you must also look into the qualifications for a payday loan alternative.

For your information, there are two types of payday alternative loans (PAL) a borrower can apply for. These are PAL I and Pal II.

To be able to qualify for PAL I, a borrower is required to join a qualified credit union. He or she must be a member of the union for at least a month before he or she can apply for a loan.

Meanwhile, for PAL II, there are no restrictions.

Now, to be sure what your credit unions offers, call or email them as soon as you can.

FAST PERSONAL LOANS

Last, but definitely not the least on our list is fast personal loans.

It is one of the best payday loan alternatives out there. It basically is much like that of a credit card. This type of loan does not require collateral, and can definitely be less expensive as compared to payday loans.

Most fast personal loan lenders have processes set up so disbursing of funds to borrowers can be done via depositing in the borrower’s account either on the same day of loan approval or the following business day.

As compared to payday loans, most fast personal loans give borrowers much longer repayment terms. Some would even last for months or years — depending on certain factors like the amount of money borrowed.

While some companies are stricter when it comes to requirements particularly credit scores, other lending companies are willing to work with borrowers that have unattractive credit.

Some of the best fast personal loan lenders are:

  • Lightstream – This lending company provides loans amounting to $5,000 up to $100,000. Thus, making it ideal for borrowers who need a large amount of money. This unsecured personal loan can be used for various reasons. However, please note that your purpose of the loan may affect the rate that the company may charge you.
  • OneMain Financial – OneMain Financial offers loans of up to $20,000. The lending company is ideal for borrowers who need same-day funding. While the company allows a larger amount of personal loans, it, however, requires collateral for that option. Generally, people who qualify for unsecured have much higher APR as compared to those with secured loans. Also, it is important to note that exact rates and limits vary depending on the borrower’s resident state, credit profile, as well as borrowing needs.
  • RISE Credit – RISE Credit is ideal for borrowers with bad credit and could hardly get a personal loan from other lenders. The downside though is that RISE charges quite high rates that span from 50% up to 299%. In addition, RISE Credit offers lower loan amounts as compared to the other options we provided. However, when it comes to repayment terms, the company offers repayment of the loan from 4 months up to 26 months (depending on the state you are in), which is desirable than those that offer repayments within just a couple of weeks.

ADDITIONAL OPTION: FAMILY AND/OR FRIENDS

If you want to avoid fees and charges, as well as huge interest rates (or if you want not to pay any interest at all), considering borrowing money from family or friends.

To be honest, your family and friends should be the first ones on your list during financial emergency situations. Why? Because most of the time, when you borrow from family or friends, they do not charge you for anything. All you need is to pay back the money in full (or depending on the terms you have agreed on).

If you looked around and found no one from among your family and friends to lend you money, then, that is the only time you check out the next possible option.

The thing about borrowing money from a family member or a friend though is that your relationship is at stake if you are unable to pay off the loan. So, unless you know in yourself that you will pay off or that you are capable of paying off the loan, then go ahead and consider this option. Otherwise, jump into the next option on your list.

FINAL THOUGHTS ON BEST PAYDAY LOAN ALTERNATIVE

Life is full of surprises, do you agree? Unfortunately, sometimes it involves money.

We are sometimes caught in situations when we badly need money to get through it, and it is during those times when we rely on lenders. We rely on companies or people who would let us borrow the money we need.

One of the popular go-to places of people in need of immediate funds is payday lenders. Yes, even if payday loans charge extremely high rates, some people would go for it thinking they have no other options left when in fact – there are other options available out there.

As mentioned above, people in need of cash as soon as possible can check out other means such as using credit cards, paycheck advance (if their company allows it), 401(k) loan, family and/or friends, and lastly, through fast personal loans.

Given the options we provided, have you already chosen a payday loan alternative where to borrow money from in case of financial emergencies?

Just keep in mind that while payday loans are tempting, you better check out other options – the best payday loan alternative to be exact.