There are many ways individuals can get money for their various wants and needs, even if they don’t have it available to them. They can take out a credit card and get a cash advance. They can go get a personal loan from a bank, payday lender, or a peer-to-peer lending network. Or, they can go to their bank and get a line of credit. Are personal lines of credit worth It? What is a line of credit? Do you need that personal line of credit? Read more on this blog to know more about it.
Most people don’t use lines of credit on a day-to-day basis. However, a line of credit is a tool you can use to get money for things like home renovations, car repairs, or even family vacations. So what is a personal line of credit, how do you get one, and how do they work?
What Are Personal Lines of Credit?
A personal line of credit is a type of loan from a financial institution that provides you with a specified amount of funds that you can access when you need them.
They differ from home equity lines of credit (HELOCs) in that most personal lines of credit are not secured by any sort of asset. As a result, personal LOCs have higher interest rates than HELOCs and other secured lines of credit.
To get one, simply go to your bank or credit union and apply for one. Depending on your income, credit score, debt-to-income ratio, and outstanding balances, you may be able to qualify for one. Limits can vary widely, so ask what you qualify for!
How Does a Line of Credit (LOC) Work?
These types of credit lines do not work in the same way that most loans do. Instead, they’re more similar to credit cards. Lines of credit are sources of funding that an individual can dip into at any time. To get access to these funds, you can ask your bank or see if you’re able to get access to them through Online Banking.
When you take money from or charge a purchase to a line of credit, interest on that purchase immediately starts to accrue. You are then given a bill at the end of the period, along with a minimum payment and a due date. You have the option to pay down the LOC at any time. In this way, they function similarly to credit cards.
What’s Better: Personal Line of Credit or Credit Card?
Personal LOCs tend to have lower interest rates than credit cards, often ranging between 7 and 15% versus credit cards that range between 14-23%. Not only that, but personal LOCs often provide larger balances.
However, unlike credit cards, personal LOCs don’t come bundled with benefits, and interest accrues as soon as a purchase is made. Credit cards come with a grace period and start accruing interest after that period, making it possible for borrowers to never pay a penny in interest when using a credit card.
Are Personal Lines of Credit Worth Getting?
We recommend getting a personal LOC and using it very sparingly. Having a LOC gives you more available credit, which helps your credit score. However, interest rates can be high so we recommend only using it for necessary immediate purchases that you can’t charge to a credit card.
In conclusion, personal lines of credit are an excellent addition to your credit mix and can be used in many different situations.