Every now and then, we might find that we could use some extra cash. Whether it’s to take that holiday, plan your wedding or in case of an emergency, it is good to have a sum of money available to you. For those with a large amount of savings which they don’t mind digging into, there is nothing to worry about, but for most of us, extra cash on demand is not always easy to come by.
Banks and lenders like credit unions have come to our rescue with loans, credit cards, lines of credit and so on. In effect, all these systems allow us to access the money we need in the present and then pay it back gradually over a period of time. A line of credit provides people with a good opportunity to finance their projects when necessary and pay back the amount over time. Let’s take a closer look at the line of credit method.
How it works (1,2,3!)
Step 1 Get a credit level
You provide your details and the &Solved team assess their information to give you a credit level between $2,000 and $20,000 depending on your income, expenses and credit history. There is no cost for this, no application fee, and it’s usually done within 24 hours.
Step 2 Get cash
Once your application has been approved, you can withdraw money up to your Credit Level at any time. The minimum first drawdown is $2,000, thereafter a minimum of $1,000 each time. You decide how much you want to draw out and when you want it, and it is deposited into your bank account, usually within 24 hours. There is no cash advance fee.
Step 2 Pay quicker & save
Interest is between 14.99%pa and 22.99%pa. The rate is assessed on your income, expenses and credit history and is charged only on the actual amount owing. We agree in writing the interest rate at the start and there are no penalties, for paying early or in full. Anything paid today doesn’t get charged interest tomorrow.
What is a line of credit?
A line of credit is a fixed amount that a bank or lending agency sees fit to let you borrow as and when you require it. Here are the features of a line of credit:
- The upper limit of the amount is pre-set.
- You can borrow as much or as little money as you want at any time within the pre-set limit.
- You only need to pay interest on the amount that you borrow and not the entire amount that has been allotted to you.
- As long as you keep paying back the interest or make the minimum payments, you can keep borrowing money from the line of credit.
- You can use the money you borrow for pretty much any project you need to finance.
How does a line of credit work?
If you need extra cash for an emergency or just to have as a backup if you do need it, you can approach a bank or lending agency for a line of credit. Each organisation will have its own criteria for deciding if you are eligible and if yes, then the amount is usually based on your credit score. If eligible, the lending agency will extend a line of credit to you.
The total amount that you can borrow will be predetermined and the length of time for which you can keep drawing on the amount will also be fixed. You can request for a time duration of several years if you feel that that’s what you need.
During the borrowing period, you will be able to withdraw as much or as little as you need from the line of credit. However, you will not be able to borrow more than the set limit. As soon as you withdraw funds, you will start accumulating interest on only the amount that you have borrowed. Each lending agency has specific terms for paying back the interest amount. At &Solved we have our interest rate dependent on your credit score:
- Great – 14.99%
- Good – 18.99%
- Fair – 22.99%
Once you have borrowed the maximum amount set on your line of credit, you will not be able to borrow any more money regardless of whether the time period has expired or not. If you start to pay back the borrowed amount either in full or in minimum payments, then you can continue to withdraw from the line of credit depending on what you have paid back. Paying only the minimum amount will mean that you continue to accumulate interest which you will have to pay back eventually.
The minimum repayment is 3% of the outstanding balance, but we’ve created this tool so you can see how much would need to be paid each month, to repay the funds within terms of 1-5 years.
How is a line of credit different from a loan?
When you apply for a loan, you are given a fixed amount that you can then spend as and when you need. However, you will have to pay back the whole loaned amount along with interest over a fixed period of time. Most loans are paid back over fixed monthly installments starting from the time of borrowing. And that’s it, it’s finished. If you ever want more money you have to go through the whole application process again (and pay the fees) with success uncertain.
A line of credit, on the other hand, allots you an amount of money, but you only pay interest on what you withdraw and use. For example, if your line of credit is $15,000 and you only use $10,000, you only need to pay back with interest on the $10,000. A $15,000 loan would require you to pay back the whole amount regardless of whether you use it or not.
If you think you will only need funds once in your lifetime – take out a loan. If you think you might need funds more than once, a Line of Credit is a better solution.
Business line of credit
Just like a personal line of credit, businesses too can apply for a line of credit. A business line of credit works in very much the same way as a personal line of credit but is used for business expenses. At &Solved we don’t lend to businesses but directors are welcome to apply personally and use the Line of Credit for the business.
Secured line of credit and unsecured line of credit
A line of credit is usually unsecured. What this means is that you don’t have to provide some form of collateral to be eligible for the money. There is an exception, however, called the Home Equity Line of Credit where you are required to put up your home as collateral. HELOCs are based on the appreciation value of your home. Unsecured lines of credit usually have a higher interest rate than secured lines of credits because the lender has to take a higher risk.
The benefits of a line of credit
- Cash on demand for any project you need to be financed.
- Pay back only what you withdraw.
- Usually unsecured and don’t need you to provide collateral.
The bottom line
A line of credit is a revolving account that serves as a bank loan alternative. Lines of credit offer a great deal of flexibility to the borrower, providing much-needed funds for a variety of uses. Lines of credit are usually unsecured except HELOCs. Individuals can apply for a Line of Credit and that can be used for their business.
To find out more about how a line of credit could benefit you, or to apply for a line of credit, contact us at &Solved.