Lines of credit operate similarly to personal loans in that they offer preset borrowing limits. Each lender may also impose additional regulations regarding going over your borrowing limit.
At the forefront of any line of credit decision is how it will be used and paid back, followed closely by repayment arrangements.
A personal line of credit provides easy access to cash for businesses whose cash flows vary month to month. Unlike loans that disburse funds all at once, personal lines of credit allow you to borrow as needed up to the limit and only pay interest on what is borrowed.
Lenders offer both short- and long-term lines of credit; short-term lines typically last 24 months while five-year loans could last even longer.
No matter its advantages, lines of credit can become costly in the long run if not used carefully. That is because tapping it too frequently could result in incurring expensive interest charges; on the plus side though, lenders tend to approve credit lines for small businesses with strong cash flows while predatory lenders may require lines for all types of businesses.
Loans typically provide you with a lump sum at the start of their term and require payments to include interest charges over time. With lines of credit, however, you can borrow and return funds until reaching your limit; typically during this draw period only pay interest on those amounts used during that draw period.
Personal lines of credit, home equity lines of credit and business lines of credit are popular forms of revolving credit available. Part-time workers frequently utilize this credit type as it can cover personal expenses between paychecks while small and medium-sized businesses use it as working capital support. While using lines of credit has shorter terms and lower interest rates than loans, its use will still impact your credit score as it’s debt; so typically reserved for those with excellent credit scores and proven financial ability.
As with loans, lines of credit require acceptable credit and must be repaid over time with regular minimum monthly payments. Compared with loans however, lines of credit tend to have lower interest rates and can be used for various purposes without incurring cash advance fees like credit cards might.
Businesses may utilise lines of credit to address short-term cash flow gaps or cover expenses that vary in cost over time, such as seasonal fluctuations or unexpected costs. Much like loans, lines of credit may be secured or unsecured depending on a borrower’s creditworthiness and lender policies; some charges annual fees while others only charge when funds are accessed while both types can incur additional charges such as application and closing costs.
Loans typically come as lump sums that require you to make fixed monthly payments over their term (plus interest), while lines of credit function more like credit cards by providing access to up to your maximum limit of borrowing and repayment.
One of the greatest advantages of credit lines, whether personal or home equity lines of credit (HELOCs), is that you only pay interest on funds you actually use. Borrowing limits may be preapproved with your loan agreement and anytime during its draw period (typically three to five years).
Unsecured lines of credit also exist, typically only requiring you to accept the risk that what you borrowed might not be paid back in full. Unfortunately, qualifying for these is more challenging since assets such as homes or cars must be used as security against potential default.