A line of credit, also known as credit limit or credit line, is the term used for the maximum amount that a borrower is allowed to get or use from a loan. Line of credit loans, as the term implies, are loan arrangements wherein the borrower is allowed to draw at his discretion from a specified maximum amount set by the bank or the lender.
The line of credit is established by the lender based mainly on the credit worthiness of the borrower. The amount that can be drawn is flexible; the borrower can draw any amount in such a way that the outstanding balance of the loan does not exceed the line of credit. The withdrawal of the loan amount can be done anytime as the need arises. Interest payments will only be charged to the amount that the borrower actually used. This means that if you do not borrow any amount from the line of credit loan you will not be required to repay anything. Repaying the borrowed amount of the loan is also flexible; it could be a smaller amount or the borrower may opt to pay off the balance of the loan totally. Oftentimes, interest-only payments are allowed. As the borrower repay portion or the whole of the balance of the loan, the credit limit is restored corresponding to the amount paid.
The interest rates for line of credit loans are usually higher than the interest rates for standard loans. The rates can also be variable and will be based on the prevailing rates when the amount is drawn and when the balance remains unpaid.
Line of credit loans are best suited for people who need to have many smaller loans over a period of time, like expanding the business facilities, buying equipment or paying college tuition fees. Instead of applying for a one time bigger standard bank loan to cover the projected present and future expenses, the borrower may apply for line of credit loan where he will only draw smaller amounts at the time that he needs them. Because the amount of the loan is drawn on a staggered basis and the interest payments are applied only to the period when the amount was actually drawn, the borrower may save on the interest payments.
This type of loan is also good for people whose incomes are fluctuating and people who are willing to pay higher interest rates just to have fund flexibility. These people may sometimes be capable of paying more but at times they will also be unable to pay the monthly repayments required on a standard loan. With the flexibility of repayments in line of credit loans, the borrower can avoid being penalized for failing to meet normal repayments; instead he will be able to maintain a good credit score despite of uncertainty in his income. Making extra repayments at times and paying off the loan early could save the extra interest payments had the balance remain unpaid for more time.
Different types of loans for different situations or lifestyle - that's what we have in the market today. You just have to compare and evaluate which is best suited for your own lifestyle.
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