How to Get a Line of Credit
As you know, there is a maximum amount that you’re allowed to spend on your credit card. This is known as your credit limit.
A line of credit operates in a similar way. It’s a predetermined amount of money that a financial institution agrees to lend you. You use the line of credit at your leisure. Then, you pay off the principal and interest only on the amount that you use.
A personal line of credit is a useful tool, especially if you’re looking to pay down debt. Lines of credit often come with lower interest rates than credit cards, allowing you to pay down debt while saving money on interest in the long run.
In this article, we outline how to get a line of credit and the benefits of doing so to help you determine whether this financial tool is right for you.
Personal Lines of Credit: The Basics
A personal line of credit (otherwise known as a revolving line of credit) essentially gives you access to money on demand. Lenders agree to extend you a line of credit up to a certain amount. You can use as much or as little of the funds as you’d like.
Personal lines of credit are popular among borrowers for:
- Home improvement projects, like a kitchen renovation.
- Paying down high-interest debt, like credit cards.
- Unexpected expenses, like medical emergencies.
- Covering cash flow crunches, like if you’re a self-employed worker with inconsistent income.
You pay interest only on what you borrow. When you pay down a portion of the outstanding balance, your available credit increases. For instance, let’s say that a bank extends you a personal line of credit for $5,000. You use $1,000 to help make monthly payments on your outstanding credit card balances.
Until you repay the $1,000, you have $4,000 available on your credit line. As you pay back the $1,000 (plus interest), your available credit increases. After you repay the $1,000 entirely, you’ll have access to the maximum amount of your line of credit again — $5,000.
Is a Line of Credit the Same as a Loan?
A line of credit is different from a loan. When you take out a loan, you receive a lump sum in your bank account. The loan amount is predetermined by your lender. Once you spend that money, you cannot pay off the balance to gain access again. If you use all of your funds from a loan, the only way to get more is by taking out an additional loan.
As soon as you receive this upfront cash, you are required to make minimum payments and must begin paying interest immediately, even if you haven’t used the funds for anything yet. The entirety of the principal and interest needs to be repaid by the date specified in the loan terms. However, once you have the principal from the loan, it’s yours, and you can use it whenever you’d like.
Lines of credit, on the other hand, often have expiration dates and are available only for a certain amount of time. For instance, you may only be allowed to draw against your line of credit for two years. Once this period expires, you are required to pay back all of the money you borrowed within the predetermined amount of time outlined in your repayment terms.
Another difference between various loan options and lines of credit is how interest is charged. Loans typically have fixed interest rates, meaning that the rate of interest you pay is not going to change over the life of the loan. Lines of credit, on the other hand, have variable interest rates. The rate of interest you pay on a line of credit will depend heavily on current market conditions, which could be either a pro or a con.
How to Get a Line of Credit: The Process
Your ability to secure a line of credit depends on your creditworthiness. Personal lines of credit are often unsecured. Unsecured lines of credit do not require any collateral, meaning you don’t need to offer an asset that the bank could seize if you were to default on the line of credit.
Lenders may be willing to work with you if you have a bad credit score or a poor credit history. There may be stipulations attached though. The lender may charge higher interest rates or require that the line of credit is secured. This means you’ll need to put up some sort of collateral, like your home.
Speak with a lending agent, bank or credit union about what types of credit lines you qualify for. From there, you can start the application process, which you can often complete online in a matter of minutes.
Before you apply, you’ll want to make sure that you put yourself in the best financial position possible. If you have any other revolving lines of credit (including credit cards), be sure to pay those down as low as possible before applying to improve your chances of being accepted. You should do this at least 30 days before applying so that the information makes its way back to the credit bureaus.
Once you’re approved for a personal line of credit, you’ll typically have access to funds in as little as one business day.
The Benefits of Securing a Personal Line of Credit
Personal lines of credit are beneficial because of the flexibility they provide. Unlike personal loans in which you receive money upfront in your checking account, a line of credit gives you the flexibility to withdraw as much or as little as you’d like, up to a certain amount. If you don’t borrow funds, you don’t have to pay interest.
Lines of credit are particularly useful as a debt consolidation tool. The interest rate on a line of credit is often lower than the annual percentage rate (APR) on a credit card. So if you’re behind on credit card payments and are being charged a high rate of interest, you could use the funds from the line of credit to pay off your credit cards immediately. This could save you money on interest in the long run.
Secure a Line of Credit May Improve Your Financial Standing
If you’re looking for a lending option that allows you to borrow with more flexibility, it may be worth your while to explore how to get a line of credit. A line of credit provides you with the maximum amount of money that you’re allowed to borrow. Should you borrow up to the maximum, you can continue borrowing again after you pay down your balance.
Lines of credit can be attractive options compared to loans because you’re not required to use the entire amount. You’re also not required to use a minimum amount. And, you only pay interest on the amount you use.
Although many personal lines of credit are unsecured and not backed by collateral, they still typically offer lower interest rates than credit cards. A line of credit, therefore, can be a useful debt consolidation tool to help you pay down high-interest debt.