Lines of Credit: Basics and Relevance

Everyone borrows money at some point in life. Whether it is unexpected household expense or urgent hospitalization of a family member, you need to borrow if you don’t have money to meet those expenses. Fortunately, there are many options when it comes to borrowing. You can go to a bank for a fixed or variable rate loan, depend on payday lenders, borrow money from relatives and contacts, use credit cards or turn to donation sites online.

 

Any of these sources may ascertain that your issues are addressed and resolved. However, most of the individuals overlook the usage of lines of credit offered by leading financial institutions such as andSolved for their borrowing needs.

 

What is a line of credit?

 

In a nutshell, it is a flexible loan from a financial institution or a bank for a business or individual. As an individual, you can borrow a specified amount of money and repay it instantly or over a specified time period. Like other financial products, they entice interest from the moment you get the loan money.

 

When should you borrow through a line of credit?

 

There are situations when taking a usual loan from banks may not be feasible. For example, it is not a good idea to take a loan every once in a while and repay it, and keep continuing the loan cycle. Also, banks are not willing to provide personal loans to individuals in many instances. In all such cases, lines of credit tend to be useful.

 

So how do they differ from regular loans? A line of credit is not offered for one time purchases such as a car or house. You can go for an auto loan or home loan for these purposes. On the flip side, lines of credit are useful in circumstances when there will be repeated outlays of cash and the amount of money is not known beforehand. Weddings and hospitalization of a family member are a good example where you can use a line of credit. Funding a home renovation project after getting a home loan is another situation where you can use this kind of credit.

Benefits and drawbacks of lines of credit

 

Lines of credit present a number of benefits to individuals and businesses alike. They are useful when you are out of options to borrow money through other financial products. Although there is a limit on the loan amount, the rate of interest tends to be lower. Also, you can get better repayment terms compared to other financial products such as payday loans and credit cards.

 

However, a line of credit is not without problems. You have to repay the loan along with interest within the specified time. Failing to do so can invite financial issues. Also, it can affect your credit score negatively.

 

Bottom line

 

Thus, it gets clear that lines of credit are a handy option for borrowing. While they come with many benefits, they have their own drawbacks. If used properly and repaid on time, they can resolve most of your financial troubles in a cost-effective and hassle-free manner. This is why they are highly recommended for individuals.