Line of Credit Loans
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A line of credit lets a borrower take out as much or as little cash as they need, up to a set credit limit. They can pay down their balance to free up more cash and lower their monthly payments. If needed, the borrower can take cash out again once the balance is freed up. A line of credit is similar to a credit card but typically has a lower interest rate.
Overview
At times, it can be difficult to estimate expenses. Volatile markets and unpredictable consumer habits can throw finances off. When facing substantial expenses, like manufacturing materials, equipment, or construction, hidden costs can pop up. Construction projects are notoriously difficult to budget because so many things can change from breaking ground to opening day.
With most loans, a borrower will apply for a fixed amount of funds, hoping the approved amount will
cover expenses. But, if the estimate is too low, they may have to procure a second loan to cover the additional costs. If the estimate is too high, the borrower could be stuck in a high-interest rate with penalties for prepayment on the principal.
A line of credit is different in two ways: the borrower can take as much or as little as they need without being charged interest on the full approved limit and funds can be withdrawn more than once.
Two basic lines of credit exist, either a secured line or an unsecured line. The secured line is the easier of the two to qualify for. The borrower’s assets can be used as collateral to secure the loan. Unsecured lines are more difficult to obtain since there’s no collateral on the loan. To qualify, a business must have an excellent credit history and extensive documentation.
Loan Highlights
Lines of credit usually have a higher limit and a lower APR than credit cards.
Payments can be made to the account to be borrowed again later.
Borrowers can take as much or as little as they need from the account, up to their limit.
Most lines are granted to businesses and corporations, not private individuals.
Pros
Lines of credit are some of the most flexible financial solutions.
Cash can be borrowed more than once without reapplying for a new loan.
Flexible credit options make it easier to plan for unexpected fees on purchases.
Funds don’t have to be used for a specific purpose, like real estate or construction loans do.
Cons
There may be some tax disadvantages to a line of credit.
Interest payments change with the balance, making accounting more of a challenge.
Unsecured lines are difficult to qualify for without a stellar credit rating.
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