When you need money, where do you turn? A loan? Your credit card? A payday lender? Your family? One option to consider is a credit line. Learn more about what a credit line is and how it works.
What do we mean by a "credit line?"
A credit line is a flexible loan that allows you to borrow as needed up to a certain limit. Just like a credit card, you don't need to take the whole amount all at once; you can draw against the loan over time, up to your approved limit.
How does a line of credit work?
When you apply for a credit line, you will be approved to borrow up to a certain amount. You decide how much you withdraw and when; you can use all or just part of it. As you borrow from your credit line, you pay back the loan along the way. But you only pay interest on the amount you’ve borrowed, not on the entire line. And as you pay down the principal of your line of credit, that amount becomes available for you to borrow again.
You can borrow as often or as much as you wish, up to the limit.
You can draw on the money from your credit line using several methods, including a debit card. For example, at Global, your credit line funds can be accessed at a branch, via an ATM, transferred to a checking account, or accessed by telephone transfer. Interest is charged as soon as you borrow the money.
What can you use a line of credit for?
Unlike a mortgage which must be used to pay for your home, or an auto loan which must be used to pay for your vehicle, money from a line of credit can be used for just about anything. You can use it to consolidate debt, pay for a remodel or home improvement project, pay for college or a wedding, or even a special vacation.
You can have the line available to you for emergencies, or to help you manage cash flow. For example, if you are self-employed and your income varies month to month, you can use money from a line of credit to help tide you over during the months you have less income. Then you pay down the credit line during those months when you have better income flow. A credit line can also be used as overdraft protection.
Types of credit lines
1. Personal line of credit
A Personal Line of Credit (PERSLOC) is an unsecured loan (which means it is not tied to collateral such as a home or an auto).
2. Home equity line of credit
A Home Equity Line of Credit (HELOC) uses your home for collateral. At Global, a HELOC can be drawn upon for up to seven years. If you use your HELOC money for home improvement, you may be able to deduct the interest paid on your taxes. Consult a tax professional.
3. Business line of credit
A Business Line of Credit provides cash flow for business owners that can be used to pay employees or vendors, purchase materials, pay taxes, and more. This is typically a secured loan, which uses business assets for collateral.
Pros and cons of credit lines
Alternatives to credit lines
Regular personal loan
If you only need a one-time loan, a personal loan may work better for your situation. A personal loan is also a great option for someone who wants a consistent repayment schedule—compared to a credit line which allows for variable draw amounts, which results in variable monthly payments, a personal loan has a fixed repayment schedule.
Home equity loan
This loan is like a second mortgage; it uses your home for collateral so it usually has a lower interest rate than a credit line. As with a personal loan, you will get the full loan amount all at once so you must begin paying down the entire loan. A home equity loan also includes costs of points and financing charges while a HELOC’s advertised annual percentage rate (APR) is based on interest only.
Many have cash advance options that let you borrow money from your card and use it to do things like pay down other debt.
A line of credit is not designed to purchase things like houses or cars; mortgages and auto loans are better designed for these expenses. A credit line is better suited for emergency expenses, or to pay for things over time rather than up front. For example, you could use a HELOC to pay for a remodel that takes place over several months. Then you could refinance your mortgage once the remodel is complete and use the refinance funds to pay off your HELOC.
What is the difference between a line of credit and a personal loan?
Credit lines differ from a personal loan in several ways. Loan terms of a credit line are open-ended. With a personal loan, you get the entire loan amount up front, and your monthly payment remains the same throughout the loan term. A line of credit has a variable monthly payment amount; the amount you pay depends on the amount you have taken from the line.
Where can you get a line of credit?
You can apply for a line of credit with Global. Your approval will be determined by your creditworthiness. When you apply, ask about interest rates and repayment schedules, fees, and other loan terms.
How to apply for a line of credit
Applying for a personal line of credit usually works the same as applying for a regular loan. At Global, you can apply for a line of credit in person, over the phone or online. You’ll need several things to complete your application, including social security number, date of birth, address, employment information, and monthly income.
Applications for HELOCs or business lines of credit work a bit differently. Learn more about HELOCs and business lines of credit.