HOW TO USE A LINE OF CREDIT TO YOUR ADVANTAGE

Life is uncertain and full of surprises. Some are good, and some, unfortunately, are bad. No one can predict the kind surprises one gets in life. However, it is possible to equip oneself with contingency plans and alternative routes when plan A goes awry. Preparing for as many possible problems as one can prevent a lot of issues in the future.

Many problems can simply not be predicted nor planned for, however, there are some problems that everyone is likely to face in their lives. Unexpected needs for cash is one of those problems. For example, there could be the doctor’s bill or you could need money to pay for a plumbing problem at home. This is the reason why Banks and other institutions that lend money survive and thrive. 

Unfortunately, whenever the subject of taking out loans is mentioned, one is horrified by the thought of missing payments and accumulating debt. The idea of accumulating debt and the cost of borrowing is a huge concern for anyone in need of cash in an emergency. 

In this article, you will learn about the best business line of credit and how to use them to your advantage.

WHAT IS A LINE OF CREDIT?

Essentially they function as a reservoir of cash that is in place and when the need arises you can borrow and repay. It functions as more of a revolving account.

 With a line of credit, the funds stay on reserve and not require any payments for upkeep until a borrowing is done. 

A line of credit is a type of loan. However, it is different from a traditional loan. The main difference is that lines of credit do not require you to make constant payments. Unlike when using a normal loan that generates monthly bills and high-interest rates, lines of credit do not need monthly fees. The only charges are after you take money out of the line of credit and you only borrow as much as you need instead of having to borrow a fixed lump sum. 

Lines of credit allow you to borrow and payback on your terms.

Another benefit of using lines of credit is that they generally tend to have lower interest rates than credit cards. You can also borrow more because the borrowing cap is much higher than most credit cards. 

Generally, a line of credit is secured against property (this is known as an equity line of credit) and it provides you with a set limit from which you can borrow for some time. This is referred to as the draw time. After this, you can make the repayments only on the amount that you borrowed.

HELP PAY OFF CREDIT CARD DEBT

Credit card debt payments tend to eat a hefty chunk of the budget every month. This is because Credit cards tend to have a high-interest rate as mentioned before. 

On average, credit cards have an interest rate ranging up to almost 20% in some cases. Having to pay a fifth of the principal that you borrowed can be financially devastating. Line of credit, however, tends to have a much lower interest rate. Most Home Equity secured Lines of Credit or HELOCs have an interest rate of 6% on average. This difference of 14% in interest rates means that it makes far more financial sense to transfer the balance to the line of payment rather than continuing with the credit card loan.

Unfortunately, it can be very easy to free up the credit card only to stack it up again and have to pay off that and the line of credit payment as well. Lines of credit are a good tool to use to get out of credit card debt but it needs to be used with financial responsibility.

TO GET A BETTER DEAL FOR A PROPERTY

When selling off the old property like a home, renovating is a good way to get a better price for it. Renovations are generally expensive but the return on investment can be very high because of them. For example, spending $30,000 to fix older damage and spruce up the house with a paint job might add $300,000 to the selling price of your house. 

Owing to the higher cap on borrowing in the case of a line of credit, that is a better option than a traditional loan. When the house is sold you can repay the amount that you borrowed to fix it up and avoid having to pay high interest for it. For bigger projects, it makes even more sense to use the line of credit option because managing cash flows is far easier than the other options for loans available in the market.

WHEN YOU HAVE TO MAKE A LOT OF SMALL PAYMENTS

Most loans are lump-sum loans and are single purpose. This means that if you want to buy a car and make down payments on some property you would have to secure two separate loans. With lines of payment, you have a set amount that you can borrow for multiple foreseen and unforeseen circumstances. 

AS EMERGENCY FUNDS

Line of credit can function as a financial reserve to set aside for emergencies. Having a line of credit means that you can borrow on demand without having to go through multiple procedures of securing a new loan. For short-term cash flow issues and emergencies line of credit function as a cushion and give a sense of comfort and surety. 

A LINE OF CREDIT NEEDS TO BE USED RESPONSIBLY

Unfortunately having access to a large number of funds with a low-interest rate can also turn out to be financially ruinous. A higher cap on borrowing means a larger amount can be borrowed very easily within the drawing period. Owing to the kind of short term thinking that most borrowers (and most humans) possess, this leads to impulse spending and debt can start stacking up. This debt can stack up to the point where payments can become very difficult to make.

To ensure that you do not end up in deeper waters than when you took the line of credit, it is important to show financial responsibility. One must secure themselves against the temptation high borrowing caps bring and view the line of credit as a safety net and use it like one.

CONCLUSION

Knowing one’s enemy is half the battle. It is even more so when the enemy is financial ruin. Lines of credit are a good way to avoid the high-interest rates associated with loans. If used smartly, they can be an effective tool for avoiding debt and meeting all of your cash flows needs. 

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