How to Choose a Line of Credit

Everyone has times when they need a little financial help to make ends meet or tackle a special project. When these times come up, you might opt to tap into a line of credit to get the cash you need.

What Is a Line of Credit?

A line of credit is a predetermined amount of money that you can use when you need it. Your bank agrees to extend this credit to you up to a specified amount, so the funds are waiting for you to use when you need them. The bank will also charge you interest on the cash you borrow. After borrowing the funds and paying them back with interest, the line of credit will continue to be available to you if you need it again.

You might use a line of credit to fund business or personal expenses. For example, lots of people use lines of credit to pay for home improvement projects. The funds could also be there for you to use if unexpected expenses come up, such as car maintenance or replacing an appliance.

You also have the option of choosing a secured or unsecured line of credit. An unsecured line of credit doesn’t need any collateral for the loan, but you’ll need excellent credit to qualify. A secured line of credit demands collateral for the loan, such as a house.

Common Terms

A line of credit will have a draw period, which is the time that you have to use the funds available. Often, a draw period will be several years. Your bank might give you a special debit card to use to draw funds.

Once you use the line of credit, the interest starts accruing. The bank will require you to begin making payments on the amount you’ve used with interest, As you make these payments, funds will be added back in to the available balance.

When the draw period ends, you’ll have a specific time period to finish paying off the balance and interest.

Line of Credit Loan Rates

Line of credit loan rates will vary from bank to bank. Often, the interest rates are variable, going up or down according to the prime rate. This means that after you draw from your line of credit and the payments and interest start, your payments will vary depending on the current interest rate and your balance due. If your interest rate is fixed, it won’t change.

Use a Calculator – Line of Credit Research

As you explore your options for a line of credit, it’s important to do your research before you move forward. Some banks offer a payment calculator on their websites so you have an idea of what you’ll pay if you choose this type of loan.

Be ready to enter your zip code, the amount of money you want available to you, the term and your credit rating into the tool. The tool will return line of credit interest rate information.

Choosing the Best Loan

Consider the terms carefully as you’re looking for the best bank line of credit. The amount of money you need, whether the loan is secured or unsecured, the interest rate, the draw period and any fees will all be important factors to explore, states Fora Financial. Once you find a loan vehicle you want to pursue, you might be able to apply for it online.