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Personal Lines of Credit

by Staff

A personal line of credit consists of a set amount of funds borrowed by applicants as needed, repaid over time, and borrowed again. The creditor determines the size of payments, the interest rates, and the sum applicants may withdraw. Some lines of credit include a type of debit or credit card, while others let consumers write checks.

This lending option may be unsecured and secured depending on your needs. Keep on reading to learn more about personal lines of credit, how they work, and what you need for the application.

What Is a Line of Credit?

A personal line of credit is a common lending option that lets borrowers withdraw a certain sum up to a predetermined limit. The lenders usually set this limit depending on various factors and the eligibility criteria of the client. Here are some of the significant factors to bear in mind:

  • The interest is paid only on the money you utilize. This is a revolving line of credit which means the applicant may borrow funds in the amount they currently need up to a particular limit.
  • Interest rates are variable. Pay attention to the interest rates as they aren’t fixed, the monthly payments will differ and they are subject to change.
  • No collateral is needed. There is no need to back the loan up with your vehicle or home. In most cases, this lending option is unsecured, though a secured one offers lower interest.
  • Poor credit holders may not apply. If you have no established credit history or a very low credit score, your application might get rejected. Payment history is significant for the application.
  • Fees are different. Each crediting company may offer different fees. Some institutions charge an annual fee while others ask for a fee each time a client accesses the credit line.
  • A secured option is cheaper. If you can use your home or auto as collateral, a secured line of credit will cost you cheaper in terms of interest rates. A good example is a home equity line of credit.

Secured and Unsecured LOCs

Many people seek unsecured lending options these days. They may search for bad credit payday loans guaranteed approval direct lenders to approve such requests if there is no guarantee. Unsecured loans and lines of credit work best for good credit holders. It means your credit history is good enough to qualify for a lending tool without the need to back the line of credit with any valuable asset.

A secured line of credit is more attractive from the creditor’s point of view, as the advanced money will be recouped in case of a default or nonpayment. From the borrower’s perspective, a secured option presents more risks as they have to utilize their vehicle or home as a guarantee that may be seized by the lender.

On the other hand, small business owners may benefit from a secured line of credit as this option offers a higher maximum credit limit and lowers interest.

An excellent credit score and a good credit history are required to qualify for an unsecured LOC. They are more difficult to receive and may offer higher rates to consumers. This is the way creditors need to compensate for the higher risk by limiting the number of money you may borrow.

Hence, credit cards allow usually have higher rates due to the same reason. They also present an unsecured line of credit with a certain credit limit without the need to pledge any collateral.

Ways to Utilize a Personal Line of Credit

  • Emergency funding;
  • Auto repair or home renovation;
  • Medical expense;
  • Relocation and moving costs;
  • Business startup;
  • Funeral costs;
  • Wedding deposits.

How to Obtain a Personal Line of Credit

If you urgently need additional funds and can’t wait, you need to prepare yourself for getting qualified financial assistance. Here are the necessary steps to get this lending option without too much effort:

  • Know your credit. It’s important to check and know your current credit rating. The eligibility criteria for getting a line of credit include having a credit score in good standing. So, get your annual credit report to check if your rating is good enough before you apply for a line of credit.
  • Choose the sum you need. The next step is to define how much exactly you wish to withdraw. Remember that the maximum amount of your credit limit can depend on your creditworthiness. Don’t ask for a larger amount than you actually need.
  • Do some research. Then, you should research the crediting companies that work for you and specialize in giving lines of credit including low credit holders.
  • Submit your application. Keep in mind that your credit rating and income will be checked by the lender before they decide to issue the money. A hard or a soft credit inquiry will be performed by them. Also, proof of your steady income and some identifying documents may be necessary to submit.
  • Obtain your money. If you qualify for a personal line of credit, you will gain access to ongoing funding without delay. This lending option can be accessed with the help of a card or checks.

Does a Line of Credit Affect Your Credit Score?

A credit inquiry is conducted when you apply for a line of credit. This credit pull may be hard or soft depending on the lending company. A hard inquiry remains on your credit report for several years and may decrease your credit rating. In case a borrower taps into more than 30% of the borrowing limit, the credit rating may also be lower.

In a nutshell, a personal line of credit may be a good option for consumers who want to have ongoing access to funding. If this is a long-term financial goal or you don’t know how much exactly you will need in the long run.

Make sure your credit rating is good enough to qualify. It may be necessary to repair your credit first or apply for a secured line of credit. If you can’t wait to obtain additional funding, you may review alternative options such as getting a credit card or a regular personal loan.

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