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.
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.
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
- Bank of America
- Navy Federal
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 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 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.
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.