How Line of Credit work

A Line of Credit (LOC) is an arrangement made by the bank (financial institution) and the customer to establish the maximum amount of loan that can be borrowed by the customer. The funds can be accessed any time by the borrower ensuring that the credit limit is not crossed. The customer also needs to ensure that the agreed requirements are followed to the tee, including the repayments on a timely basis.  In short, you can term the line of credit as a strategy to help in tackling unpredictable and variable costs.

Types of Lines of Credit:

For those who opt for the line of credit, need to understand that there are basically different types of the lines of credit available.  This is divided into the business line of credit and the personal line of credit. The financial institution involved in this sets the credit limit with both the types of line of credit. You also have the secured and the unsecured lines of credit.

*Secured Line of credit:

This line of credit is backed by specific collateral, like a boat, home or any other asset which is ‘valuable’. This is available at a low rate of interest since it tends to be less risky to the lender.

*Unsecured Line of credit:

As the unsecured line of credit does not require any collateral, it gets a little tough to apply. This is risky where the lender is concerned and thus, you find the rates of interest quite high.

*Personal Lines of credit:

If this is attached to the property, this becomes a secured loan and is available with a low interest rate. You can apply for this at the bank with which you have a checking account. This is a requirement so that the transfer can be done conveniently. The personal line of credit can be used the way you want but in case of no repayment, there is a possibility of the assets being seized.

*Business Line of credit:

This is specifically designed for funding short term financial needs related to a business. The business line of credit is apt for those looking to expand and improve the business set-up. You can also use this line of credit for the immediate requirement in case of a new business.

Tips for Applying for Line of Credit:

Before you apply for the line of credit you need to consider specific factors. This ensures that the line of credit opted for can be beneficial to you in more than one way.

1. Go through and review your report of credit. You need to be aware of how good the credit score is and if you owe any large sums of money to anyone.

2. Applying for a line of credit with any financial institution requires a copy of financial records. They need to have a clear picture of where you work, how much you earn and what type of work you do.

Take your time before applying for the line of credit. In case of any confusion you have the freedom to get in touch with a financial advisor.