All About Personal Line Of Credit

A personal line of credit is a type of loan that is extended to individuals from a bank or a lending institution. It allows the individual to maintain a maximum loan balance account with the lending institution, from which he/she can borrow amounts that are lower than or equal to the credit limit as and when the need arises. The borrowing limits, interest rates, minimum monthly payment, the tenure are all decided while establishing the line of credit .

A personal line of credit can be a useful tool to borrow money incrementally.While the lender will pre-approve a particular sum of money, the borrower need not withdraw the entire amount immediately, unlike a conventional loan. But instead, have the freedom to access the funds over a period of time, as and when needed  by simply writing a check or making an electronic transfer.

Another positive feature of the line of credit is that  interest has to be paid only on the amount actually used and not the amount set as credit limit. However,the line of credit may also have an annual service fee and that is payable regardless of whether the funds are used or not ,for as long as the account is open.

Anyone with a strong credit history who can prove his/her ability to replay the borrowed sum can opt for a personal line of credit. In fact the better an individual’s credit rating, the more likely they are to get a personal line of credit.A personal line of credit has some advantages over a personal loan,credit card cash allowances and HELOCs as follows:

Firstly, unlike a personal loan, a personal line of credit allows a person to borrow only the amount they need and offers a variable interest rate that is generally lower than that of personal loans. And the repayment amounts are directly influenced by the outstanding balance.

Secondly, while credit card cash advances are similar to personal lines of credit in terms of withdrawing only how much you need, credit card APRs are generally higher than those of lines of credit. But that’s not all, credit card cash advances may also come with extra fees, so its necessary to inquire into expense in either case before opting for one or the other.

Thirdly,a home owner could be eligible for a home equity line of credit (HELOC), where their property would serve as collateral. And since this is a secured line of credit, the interest rates on a HELOC will be generally lower than the personal line of credit.However, this method involves putting homes up as collateral and risk losing them! Since the personal line of credit is unsecured, the maximum that can happen is a larger penalty for non-payment of the sum borrowed.

So the advantages of a personal line of credit are:

1. Instant access to cash
2. Higher credit limit
3. Lower interest rates
4. Interest payable only on amount withdrawn
5. Interest paid is tax deductible
6. No restrictions or limitations on usage of funds
7. Provides an additional resource and helps you avoid dipping into your long-term savings accounts

However the most important factor to consider when deciding whether to go for a personal line of credit as opposed to the various other loan options available is the repayment clause. Most personal loans have a clear, straightforward repayment system where the borrower makes regular payments for a set repayment term. In such arrangements, the monthly payments are set at the beginning of the loan where the balance and interest earned on the loan are calculated, and divided over monthly payments to ensure complete repayment of the loan within the repayment period.Payments for a line of credit, on the other hand are not set up for paying off the credit within a certain time frame, and rather a minimum payment amount is set, depending on the outstanding balance. The interest rates on a line of credit is usually determined by the lender themselves, so it’s best to do research before picking an institution to avail a personal line of credit from.

A personal line of credit could thus works as a back-up in a multitude of situations.