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Line of Credit

Get a Line of Credit and Be Ready for Emergencies

A personal line of credit (LOC) functions similarly to a credit card: a maximum amount is set to be spent over fixed periods of time. Borrowers can spend the specified amount of funds as needed and repay them over a period of time that is determined by the lender, which is usually a financial institution such as a bank. As the borrowed funds are paid back, they become available to be spent once again, which is an arrangement known as revolving credit. A personal LOC and a personal loan differ in the sense that a loan is dispersed to borrowers as a lump-sum payment, but both an LOC and a loan are subject to interest rates. To learn more about the eligibility requirements and benefits that regard a line of credit, read the sections below.

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Line of Credit Eligibility Requirements

A personal line of credit is classified as an unsecured loan, and is therefore issued to borrowers based on the worthiness of their credit history and score rather than by any collateral assets. Conversely, a home equity line of credit (HELOC) is classified as a secured loan, and thus it is secured by the equity in a borrower's home. An LOC is also classified as a revolving credit account, which allows borrowers to spend a set amount of funds, pay them back and use them again in a continuously revolving cycle.
Credit limits are determined by a financial institution according to the appearance of a borrower's ability to repay borrowed funds. Thus, a borrower's credit score, credit history and accumulated debt play significant roles in the amount of funds made available through credit lines. Additionally, a borrower's creditworthiness and a financial institution's leverage to take risks may significantly impact the approval or denial of an LOC. Over time, a credit limit may be increased or decreased based on the borrower's updated credit score and ongoing ability to pay back funds.
Because every borrower has a particular credit history and every financial institution has its own guidelines governing the approval or denial of lines of credit, every credit request happens in a different context and is subject to different factors. Borrowers may improve their credit scores and become more qualified for an LOC by paying off accumulated debt, disputing incorrect details on a credit report and building a longstanding credit history.

Benefits of a Line of Credit

A line of credit may be beneficial to borrowers who want access to funds on a recurring basis. It is not a good alternative if the borrower intends to make a big, one-time purchase such as a house or car, but it is particularly advantageous for emergency situations and recurrent everyday expenses. Below are a few of the most significant advantages regarding a personal LOC:

  • Fast and revolving access to funds
  • Competitive rates offered by several different financial institutions
  • Leverage to avoid overdraft charges on checking and savings accounts
  • No hold on collateral assets such as a borrower's home

Funds from an LOC are particularly useful for a borrower to make payments toward events such as a wedding, birthday or funeral, afford emergency expenses such as tax, utility or medical bills and postpone incoming payments such as school tuition charges.

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Problems Associated With a Line of Credit

Like personal loans, a personal line of credit gives borrowers access to funds that are expected to be paid back. If not paid back on time, borrowed funds may be subject to high interest rates that accumulate toward personal debt. Below are a few of the most significant disadvantages associated with a personal LOC:

  • High interest rates in comparison to secured loans that have a hold on a collateral assets
  • Low monthly minimum payments may yield an accumulation of debt
  • Interest is not tax deductible
  • Maintenance fees charged by certain financial institutions

If a line of credit seems disadvantageous or is denied to a particular borrower, there are other personal financing methods from which funds can be accessed through, such as credit cards, personal loans and pawn or payday loans. However, most financing methods take into consideration factors such as credit score and history. If a borrower's creditworthiness is relatively low, he or she may consider obtaining a secured loan where a home can be used as collateral, applying for an LOC through a different financial institution that may be more likely to take risks or waiting for his or her credit to improve before requesting to borrow funds again.

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Preparing to Apply for a Line of Credit

You can make yourself more attractive to potential lenders by looking objectively at your finances. If you are looking to fund a major event such as a vacation or a move, you can begin to address negative credit report points to help increase your score and make getting a line of credit more of a possibility. Having a budget can help you look at your monthly expenses and find room to pay down some of your current debt such as student loans, any accounts in collections or credit cards. You should also verify that all the information listed on your credit report is accurate. You can dispute inaccurate information to increase your score.

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Additional Information

To prepare for your LOC, you should also consider reducing some expenses so that your line of credit can go further. The less you have to spend on other bills or debt, the more you can spread out the use of your line of credit to maximize its value to you. Once you have reduced your expenses, you should make a plan for the use of your credit as well as a plan for repayment. It is important not to utilize all your available funds in a short period. Instead, be a conservative as possible so that the funds can reduce stress and improve you financial stability.

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