What are personal credit lines?
Often jointly marketed with credit card promotions, personal credit lines are flexible unsecured loans from a bank or financial institution that allow users to borrow money when they require it. The credit line can be used at any time and for almost any amount no matter how small. Borrowers must repay it immediately or over a period of time specified beforehand. Borrowers will have to be approved by the banks according to the borrower’s credit rating or relationship with the bank. Interest will be charged once the loan is borrowed.
Personal credit lines are great for businesses or individuals who find that their income does not come in regularly and they need a quick personal or business loan to settle their monthly income and expenses or finance projects. Such loans are normally not underwritten by banks. A personal line of credit would then be a great way to get some cash to pay off some of their bills while waiting for their income cheque or payment to come in.
Personal credit lines are often not intended to be used to fund single one-time purchases such as houses or cars, which is what mortgages and auto loans are for.
The Benefits
There are numerous reasons why one should consider getting a personal line of credit for personal loans.
It is a resource that allows fast access to funds when needed.
This cash loan can be taken out at any time of the month, and is usually instantly approved. There is no need for a lengthy loan application process here – the emphasis is on getting a fast loan. This is the main benefit of this financing option – a cost-effective solution to financial vagaries or completing a complicated transaction.
Personal line of credits usually have lower interest rates (personal loan rates) as compared to credit cards advance schemes, making this the premier choice for instant loans.
While both credit cards and line of credits have annual fees, interest is usually charged only if there is outstanding balance.
Also, credit cards have monthly minimum payments and interest rates will increase greatly if payments are not made. However, not all credit lines have such monthly repayment requirements.
Borrowers can choose between secured loans or unsecured loans options (based on their bank’s program)
Secured loans requires some sort of collateral to the bank for using the personal line of credit while the unsecured loans does not.
This flexibility makes it great for instances of uneven cash flow. However, it is usually only recommended for those who are not in any financially precarious situation.
The Problems with Personal Credit Lines
There are a few things one must consider about a personal line of credit before running to apply for a personal loan however.
While more attractive than credit card advances, it does not have the lowest interest rates around.
The interest calculations can be complicated and many often are surprised at how much they end up paying. The interest is not tax deductible as well, and some banks may charge maintenance fees even if your line of credit isn’t used.
Thus, if you do not need the money right away, it is recommended for you to take a look at the all the options available before deciding on the right one for you.
To be eligible, you need a strong credit history and good credit score.
This means that you must demonstrate the ability to consistently repay all your loans and bills to even be considered for approval by the banks.
Those who are unemployed or do not meet the minimum income requirement are unable to apply for a personal line of credit as well. This might seem very restrictive, but is a very good measure against creating more debt for those who cannot afford it.
Usually, quick repayment of the line of credit loan is required – as soon as you have received your incomes or payments, you are expected to pay it back.
If the due date is missed consistently, the interest rates will increase accordingly and a late payment fee will be imposed. Check your bank of choice for more details and information.
Concluding Points
While personal lines of credit are a great financing option for fast and easy loans, there are numerous fees associated with such an account. For example, there is usually an annual fee involved.
As suggested, and if you have time, consider all the options available to you for financing and take note of any side fees that must be paid for their usage.
Written by Claudia Li.
About the Writer: A 90s kid, Claudia is always on the lookout for the best credit cards to supplement her lifestyle. She isn’t afraid of credit card salesmen who approach in public for a chat, and constantly works out the best ways to save on any transaction with her arsenal of cards. Previously in the marketing industry, she now writes on various topics including personal finance, business marketing and other interests.
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