All lines of credit are the same, right? Not so fast. While every line of credit is a flexible tool that provides access to funds on a rotating basis, each one might have unique features and quirks that set it apart from the rest.
So, how can you tell which one is best suited for your financial task? Check out the list below to learn how diverse these financial tools can be. What you learn here today can help you pick the one most aligned with your goals.
How you use a personal LOC is just that — personal! People apply for these loans when they need to take care of their personal affairs, such as home renovations, debt consolidation, or unexpected emergencies.
The online loan experts at MoneyKey advise their borrowers to think of the personal LOC as a safety net in emergencies. That means you shouldn’t dip into it whenever you want to start a new project or buy something new. Instead, you should keep your line of credit on standby until a car repair or medical expense surprises you.
This tip from MoneyKey can help you avoid relying on your LOC too often, which may save you interest payments in the long run. After all, interest is charged on the amount borrowed, so the less you borrow, the less you accrue.
A business LOC is just like the option above, except it’s designed to help you with professional expenses rather than personal ones. If approved, you can rely on this source of funding for operational expenses, inventory purchases, or bridging cash flow gaps.
With a predetermined credit limit, you can withdraw funds when necessary, pay interest only on the amount you use, and repay the borrowed funds.
So far, the options above have been unsecured, and unsecured loans rely on your creditworthiness. A financial institution will assess the likelihood you’ll pay them back by reviewing your finances. They may look at your credit score, income, and pay schedule to determine if you are worthy of their loan.
This next option, the HELOC, is a secured line of credit. Secured loans require collateral, such as a savings account, certificate of deposit (CD), or another valuable asset. By providing collateral, borrowers reduce the lender’s risk, which often results in more favorable interest rates and higher credit limits.
When it comes to a HELOC (home equity line of credit), your collateral is the equity in your home. In other words, you borrow against the value of your property.
For most people, the equity of their home opens up a large sum of money, making it an attractive option for enormous expenses such as home improvements, education costs, or debt consolidation.
Which One Will You Borrow?
Understanding the different types of lines of credit empowers you to choose the one that aligns with your financial goals and needs. Whether you want personal flexibility, business funding, or greater home equity, exploring the nuances of each type will help you make an informed decision and maximize the benefits of your line of credit.