Personal Line of Credit

Sometimes, life throws curveballs when you least expect it, causing a need for extra cash on an ongoing basis. When you find yourself in this situation, applying for a bank loan can help fill the gap, but may not be your best option. Instead, look into a personal line of credit to meet your ongoing needs.

Line of Credit Basics

Unlike a standard loan, a personal line of credit is a lending vehicle that functions much the same as a credit card in the sense you can purchase and make payments up to your credit limit. Don't be fooled into thinking credit cards and credit lines are the same because lines of credit offer additional options to advance you money. That being said, both can fill cash flow gaps when used in a responsible manner.

Your lender approves you for the highest credit limit you qualify for under the lending guidelines. Essentially, a lender assumes you'll max out the line and sets the limit based on what you can afford to repay each month. Once established, you can draw funds from the line of credit and repay the funds based on your needs and cash flow. Because you advance funds over time, most lenders charge a variable interest rate that fluctuates with the Prime rate set monthly by the Federal Reserve Board.

Line of Credit Advantages

The main advantage of a personal line of credit is the ability to decide when and how much you borrow. Lines of credit are ideal for funding projects with undetermined expenses. If you'd used a loan, pay more monthly if you estimate too high. When the opposite is the case, you may be unable to obtain a loan for the additional funds. Using your line of credit allows you to only pay for the portion of the money you use, potentially saving hundreds of dollars in interest charges.

In addition to the flexibility provided, you can take advantage of interest rate decreases as each occurs. Depending on the terms of your personal line of credit contract, your rate may adjust monthly, automatically reducing your payments as interest rates fall.

Line of Credit Disadvantages

Economic instability is the biggest disadvantage of personal lines of credit. In a rising interest rate environment, you risk a hefty increase in interest costs and payments. Your lender may write an interest rate cap into your contract, but this can be several percentage points higher than you're comfortable paying. Regardless of the current interest rates, always consider your ability to repay your credit line at the highest allowable rate before taking the deal.

Overall, a personal line of credit is a decent borrowing option when you need increased flexibility in the way you use your loan proceeds.

http://www.superpages.com/supertips/personal-line-of-credit.html