If you are looking to take out a personal line of credit, 2020 seems to be the year to do it. With the Fed dropping interest rates to zero, and banks giving out more credit, with fewer criteria—now is an easy time to take advantage of the cash fluidity that lines of credit bring.
However, before you open a personal credit line, there are a few things you need to know.
Personal lines of credit have a number of advantages. They can be of great value in certain situations. At the same time, a personal line of credit also has its pitfalls.
It is essential that you are aware of these so that you can leverage a personal line of credit the smart way, without falling into any credit line traps.
If you want to get savvy about personal lines of credit, you are in the right place. Read on to learn the 7 things you should know about credit lines.
1. Lines of Credit Can Be Ideal If You Are Self-Employed
Many people abuse their personal line of credit loans, ending up a slave to their debt, living paycheck to paycheck. This has given credit lines and credit cards a bad rap. However, there are certain situations where having a line of credit can be of great benefit.
One of these is if you are self-employed. Unlike income that comes from an employer, self-employed income can be unpredictable. Project size and the time it takes a client pay can impact one’s cash flow.
Say, for example, you run a wedding planner business. Payments are likely to be large but dispersed. You also don’t have a guarantee of exactly what day a client will pay, or in some cases whether they will pay at all.
Having access to a line of credit can be ideal in these instances as it allows you to smooth out your cash flow. In short, if you are working in an industry where payment is large and irregular, a credit line could be of great assistance, providing you manage it.
2. Secured vs. Unsecured Lines of Credit
When opening a credit line, it is important to know the difference between an unsecured and a secured line of credit.
Secured lines of credit are backed by an asset as collateral, such as your car, home or another asset of value. If you default on your repayments, the bank can then lay claim to the assets that you have as collateral on the line of credit.
Unsecured lines of credit are not backed by any collateral. Because of this, they are a riskier product type for banks. To compensate for this, the interest rates on unsecured lines of credit are higher than for secured credit lines.
3. Interest Rates Are Subject to Change
When looking to take out a line of credit, you need to be aware that interest rates on personal credit lines are subject to change. They are not fixed and can vary in response to market conditions. This is because interest rates on lines of credits are set at a percentage rate above or below the prime lending rate.
These fluctuations make it essential that you manage your credit lines conservatively. Low-interest rates can cause you to be able to pay your credit back with ease, which in turn can trigger you to increase spending. Once interest rates rise again, you might find it increasingly difficult to pay back your outstanding balance.
4. The Fees Can Add Up
It is common knowledge that the interest rates on lines of credit can be expensive.
However, you also need to factor in the fees associated with the different credit line options you are looking at.
Many providers charge transaction fees each time you borrow from your line of credit. These can add up if you make regular withdrawals.
Additionally, some lending institutions also charge maintenance fees, even on unused accounts.
To avoid spending more than you need to on fees, be sure to read the fine print and get clear on exactly how much you will pay and for what.
5. You Can Ensure a Personal Line of Credit
Did you know that you can ensure a personal line of credit? Well, you can, and it can be a wise choice to consider.
Loan protection insurance yields a couple of benefits. It can protect you from defaulting on your loan, providing that you were unable to make a payment because of a reason that is included in your coverage. Examples of this would be loss of employment, illness, injury, etc.
Credit line insurance also protects your family from being liable for your debt should you be rendered unable to earn an income at any point.
6. Some Lines of Credit Are Subject to Bank Drawdowns
A very important thing to be aware of when looking into opening a line of credit is bank drawdowns.
Depending on your agreement with your lender, you may be required to pay back the full balance on your line of credit unexpectedly. This usually occurs during times of economic uncertainty.
If your cash flow is compromised and your lender demands full payment on the credit line, this can put you into a tricky situation.
Be sure to always check your agreement in order to know whether or not you are at risk of this.
7. You Can Consolidate Lines of Credit With Balance Transfer Cards
If you have taken out multiple lines of credit in the form of credit cards, you can consolidate these with a balance transfer card.
The advantage of this is that it will consolidate your debt, leaving you with one monthly payment to keep track of.
What’s more, in some cases you may be able to secure a zero balance transfer card. Zero balance transfer cards allow the holder to enjoy an interest-free period, usually between 12 and 24 months. During this time you can take advantage of the savings you will realize to pay off your credit.
Consolidating your debt with a zero balance card is a popular strategy for whittling down debt that has escalated.
Do You Need a Debt Consolidation Solution?
A personal line of credit can be a very handy thing, especially if you are in a profession or industry where cash flow is uneven.
However, personal lines of credit can also get out of control, leaving you battling interest, fees, and growing debt.
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