Cash 1 Blog
What Are the Different Types of Lines of Credit?
Less than half (41%) of Americans could not cover a $1,000 emergency with their savings. This is unsurprising as the cost of living continues to rise without significant changes in wages.
If you are part of the majority that could not cover an emergency of this size, a line of credit may help. If you already have a few lines of credit and wonder, how many lines of credit should you have? Don't worry. This guide will cover all of your questions and help you understand the different types of lines of credit.
What Is a Line of Credit?
A line of credit (LOC) is a type of revolving credit that customers can use to get funds. The maximum loan amount, interest rates, payment sizes, and withdrawal amount gets determined by the lender.
You'll have access to the funds in a line of credit if you don't go over the limit and meet any requirements necessary. One of the significant factors is making your minimum payments on time.
Types of Lines of Credit
There are different types of lines of credit that have various benefits. The general advantages of each line of credit are flexibility, including flexible payment and financial safety.
LOCs are flexible because you can request any amount up to your limit without drawing the entire amount. You'll only pay interest on the amount you draw out, not the total available amount.
If you continue to meet your minimum payment requirements, you can adjust how much you pay, making the repayment schedule flexible. You can pay off your whole balance or only keep up with the minimum.
As a general rule, you should pay as much off as you can at one time. A line of credit also works as a financial safety net if you run into trouble because of unforeseen circumstances. Until your next paycheck, you can cover the unexpected expenses with a line of credit.
The different lines of credit are personal, home equity, business, secured, and unsecured.
Personal Lines Of Credit
Personal lines of credit allow a borrower to repay the funds on a revolving basis. When applying for this type of credit, a lender will check your current credit score.
To qualify for a line of credit with CASH 1 Loans, you'll need:
- To be a resident of the state where you apply
- To be 18 Years of Age or Older
- To have an Open Checking Account
- To have Proof of Income
- Not to be on Active Duty in Military
A personal line of credit is used when you face an emergency issue. If you need something dealt with right away but don't have the necessary funds, you'll likely opt for a personal line of credit.
Home Equity Lines Of Credit
Home equity lines of credit (HELOC) is a form of available secured credit because you'll offer your house as collateral. Your available credit gets determined by the amount of equity in your home.
You can borrow as much as you need up to that available limit. The maximum is usually around 80% of what your home is valued at, minus how much you currently owe on the mortgage (otherwise known as equity).
After the draw period is over, the balance you used is due, and repayment begins. You'll typically have ten years or less before reaching the draw period.
There are some additional costs to getting a HELOC. For example, the cost of getting your home appraised is factored in.
This line of credit is best used for large expenses or to consolidate debt that you already have with high interest rates. Many opt for this line of credit to help with debt because of the low interest rates and tax benefits.
The line of credit is only tax-deductible on the interest paid. HELOC money must also improve, build, or purchase the home up for collateral to be tax-deductible.
Business Lines Of Credit
A business line of credit is used for businesses. Shocker, right? Instead of taking out a separate high-interest loan, a business owner can borrow money when needed through a line of credit. The lender bases the amount given on the profitability of the business.
A lender will also check the market value of the business and any risks to determine specific loan details. Business owners can benefit by taking out money when they need it without getting approval from the lender.
This line of credit is flexible in the world of business. You can use it on inventory, equipment, services, or any other business expense.
Secured vs. Unsecured Lines of Credit
Chances are, you already have a form of secured or unsecured line of credit. The differences are as follows:
To receive a secured line of credit, you must offer up collateral. A typical example of these loans is a car or home loan. If you fail to make payments and cover your debt, the lender has the right to seize the asset you put up for collateral.
These loans have lower interest rates and higher amounts than unsecured LOCs because it is less risky for the lender. This is their way of securing payment in advance.
Most lines of credit are unsecured, meaning you don't offer up any collateral to the lender. Since this is a risk for the lender, they will make interest rates higher.
Credit cards are the most common type of unsecured line of credit. Your credit limit is how much you can borrow. You'll only pay interest on the amount you use.
A lender cannot take anything from you as collateral if you fail to make payments on a credit card or another unsecured line of credit. However, your credit score will start to decrease.
Open-End vs. Closed-End Credit
The different lines of credit will fall into one of two categories; open-end/revolving credit or closed-end credit. They differ in the following ways:
Open-end/revolving credit lets a borrower take out amounts during the draw period. They can make payments throughout the life of the loan. Credit cards, HELOCs, and personal lines of credit are all great examples of an open-ended credit product. When an amount of available credit gets withdrawn and repaid, the money is available to borrow again.
Because of this, an open-ended credit line is mainly used to fund needs that cost a lot of money over a long-term time frame. This line of credit has its advantages, but keeping the product open may come with fees.
Otherwise known as an installment loan, a closed-end line of credit allows the borrower to get a specific lump sum amount. This is used for something that needs payment upfront.
Many use it for a specific purpose, making it less flexible than an open-end credit. Money gets disbursed in a lump sum and cannot be drawn out again even after repayment.
Money is lent for a specific amount of time before repayment begins. Repayment is made through regular, scheduled payments, not all at once. The borrower will also pay the principal and interest at this time.
What Would You Need a Line of Credit for?
There are many instances where you may need or find a line of credit useful. Below are some circumstances where you could use your line of credit wisely.
When you need an auto repair but don't have the means to pay for it yourself, a line of credit can help. Emergency car repairs can be unexpectedly expensive.
If you rely on your vehicle to get to work every day, you'll want to fix the problem as soon as possible. You can use a line of credit in this instance by taking out a personal loan or applying for a new credit card.
Unexpected Utility Bill
Unexpected utility bills come as a shock to people that don't have money saved up to cover them. If your utility bills change every month, this occurrence may happen to you.
To pay off the expenses with a low interest rate, you can take out a line of credit. There is no reason to get penalized for not paying a bill when you have this option available.
An appliance issue can make your daily life more complicated. It's best to get these fixed right away.
The most common appliance repairs homeowners need are stovetop repairs, refrigerator repairs, oven repairs, etc. If you don't have enough room in your budget to pay for these necessary repairs, get a line of credit.
Fees For Your Child's Schooling
If your kids are on their way to college, you'll have to figure out how to pay for it. You may have saved up for this moment for years, but with the increasing schooling costs, you still might not have enough.
With a line of credit, you can take a lump sum out to cover the necessary schooling costs. You won't have to begin repayment until your child graduates from school.
Unexpected Dental Work
Whether you have a tooth that's been bothering you for years, or you slipped and knocked a tooth out, a line of credit can cover the dental costs. Even with insurance, you may have to pay out-of-pocket fees for dental work.
If your pet needs immediate surgery or has to take a visit to the vet because they are sick, your insurance won't cover the cost. Instead, use a line of credit to cover the bill all at once.
Understanding the Different Lines of Credit
Navigating the answer to how many lines of credit you should have doesn't have to be complicated. As long as you educate yourself on each type and read the fine print, you'll be in good hands. Using a line of credit is a great way to pay off unexpected occurrences, remodel or rebuild your home, cover business expenses, and boost your credit score.
If a traditional bank has denied you a line of credit, all hope is not lost. Apply online in Idaho, Kansas, Missouri, Louisiana or Utah with CASH 1 Loans to get approved for a line of credit in minutes.
Joseph Priebe takes pride in assisting audiences with his articles to help them make sound financial decisions.
With over ten years of experience writing financial content his goal at CASH 1 has always been creating engaging and easy-to-digest information for anyone searching for immediate or long-term monetary solutions.
When Joseph is not writing about personal finance, you can find him photographing the Southwest United States with his 4x5 Graflex Crown Graphic camera. He is based in Phoenix, Arizona.