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Understanding How Lines of Credit Works

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Life is unpredictable and full of surprises—whether good or bad. As such, it won’t hurt to be prepared when welcoming unexpected news of joy, and indeed, it would be better if you are ready for some unwelcoming news.

One of the unpredictable occurrences is the need to put money on the table. Expenses like car repairs, home maintenance, or hospital/medical bills are one of life’s events that can surely put a hole in your wallet.

So, if you are looking for a wise way to help during these times of unexpected needs, then there’s this one option that you can go to aside from credit cards and payday loans, which comes at a high price. It is called a line of credit.

First, What is a Line of Credit?

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Abbreviated LOC, according to Forbes is a type of bank loan wherein you can withdraw a certain amount which was agreed by both parties. This type of loan is offered by many banks and lenders for a specific purpose. An example of this is home equity lines of credit, which is primarily used for home renovations.

Now, if you are running a business or is self-employed who have problems with cash-flow, then you may want to consider a line of credit to help you out and give the leverage that you need.

Difference between LOC and Traditional Loan

Wondering about the difference between a line of credit from a traditional loan? Then here’s what you need to know.

The primary difference is how and what you should pay. This type of loan only requires payment for the interest and fees of the fund that you borrowed, whereas the traditional loan gives you an influx of cash, which you need to pay immediately.

How Does it Work?

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So, how does a line of credit work? This type of bank loan is slightly similar to how we deal with bank cards wherein you have the choice to use the funds that you know would suit you best. However, the advantage of LOC from a bank card is that the interest rate of the LOC is considerably lower.

In addition, the credit card’s limit spending is much lower than a line of credit, which comes with a higher account limit. Also, you will receive a monthly statement that shows your balance (your minimum payment, fees, and summary of interest).

If you have questions or you want to have an in-depth explanation regarding a line of credit, then you should go to a banking institute or lenders like the Mulligan Funding to help you sort out your LOC.

What are the Different Types of LOC?

Since the reason for applying for a line of credit differs from person to person, there are different types of LOC to help bridge the financial gap. Here are the following types with its use:

Secured and Unsecured LOC

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The secured LOC is primarily backed by collateral. Examples are houses, vehicles, or other valuable assets that you own. The secured line of credit usually has a much lower interest rate since the risk is less for the lender.

On the other hand,  the unsecured LOC, which is the opposite of the secured LOC doesn’t need collaterals, but it is more difficult to apply for and has a higher interest rate.

Personal LOC

This one is attached to private property of yours, putting it under the secured loan category wherein the interest and fees are lower. However, if it is not backed by collateral, then it is an unsecured loan that comes with a higher interest rate.

With this account, you can use the money however you want, but if you have collateral assets, then the financing institution may seize it if you cannot pay the balance in time.

Home Equity LOC

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This type of credit line helps with your home improvement projects or any emergency repairs. It is usually backed by the value of your house and is considered as a secured line of credit.

Business LOC

If you want to start a business or you are planning to take your business to the next level, then this is a wise option. This kind of loan is designed to fund short-term financial needs such as buying new equipment or purchasing inventory and creating a more consistent cash-flow. You can also check other sources  for additional short-term financial options.

Takeaway

Now that you have learned the things that you need to know about the line of credits, you can now apply for it with ease and confidence. If you have questions or other concerns regarding a line of credit, then it is probably best that someone knowledgeable explains it to you well or have a financing institution explain it more thoroughly for you.



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