What is a line of credit and when is it a better option than credit cards, Money News
A line of credit is a type of unsecured loan that you can use when needed, up to four times your monthly income, or more if you earn more than $ 120,000 per year.
Also known as a personal line of credit, you can borrow from the available credit limit on your line of credit account until the credit limit is reached.
No matter how much you borrow from this credit facility, it will count towards your unsecured debt limit, currently capped at a maximum of 12 times your monthly income.
Why is a line of credit important? To answer this, we will have to look at its unique characteristics.
Read on to learn more about the benefits of lines of credit, who would benefit the most from them, and when to use them compared to credit cards.
Benefits of a line of credit
1. Flexible credit withdrawal and loan term
Unlike a personal loan, you don’t have to lock in your entire loan amount or decide on your term when borrowing.
A line of credit can be particularly useful for those who need to borrow but are unsure of exactly how much they need.
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2. Daily interest charges apply to the amount withdrawn.
With a line of credit, you will only have to pay interest on the amount you withdraw.
As always, you are encouraged to borrow only what you need, no more and no less.
Think of a line of credit as a solution to your short-term borrowing needs.
With that said, keep in mind that banks generally charge a fee for opening a line of credit as well as an annual fee for maintaining your line of credit account.
3. Flexible repayment options
You set your own rules for repaying the amount you borrow.
You can choose to pay the minimum payment amount (typically 2.5% to 3% of the outstanding balance), make a few separate payments over several months, or even clear your outstanding balance within days or weeks without incurring any additional charges.
Prepayment charges generally apply when you pay off your debt quickly in advance.
Opt for a line of credit, you will not have to face such fees.
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4. Lower interest rates than credit cards
At around 20 percent per year, lines of credit have relatively lower interest rates than credit cards, which typically charge around 28 percent per year.
If you are considering strictly between lines of credit and credit cards, it should be obvious which option is more cost effective.
When to use a line of credit instead of credit cards?
A line of credit can come in handy when you anticipate needing to borrow money multiple times and want to use a convenient and flexible facility.
This can be especially useful if you need a bridging loan or aren’t sure exactly how much to borrow.
Remember, interest rates will only apply to the amount you withdraw from your line of credit account.
In addition, it is not necessary to process multiple loans with a line of credit.
All of your transactions are posted to one line of credit account and you are allowed to borrow from the same line of credit account, up to your credit limit.
This will make it easier to follow up as well as make payments on your end.
That said, you have to be disciplined to avoid borrowing too much and getting into more and more debt with such easy access to cash.
In addition to the possibility of going into debt, over-limit fees ranging from $ 40 to $ 50 may apply if you exceed your line of credit limit.
|Credit line||Credit card|
|What it is best used for||Short term flexible loan||Payment method, tool to earn credit card rewards|
|Interest rate||Usually around 20 percent pa||Usually around 28 percent pa|
|Type of loan||Insecure||Insecure|
If you need a convenient service that you can easily access for your short-term borrowing needs, credit cards aren’t the answer.
To be clear, credit cards are designed to be hassle-free payment methods for users.
They also serve as a rewards catalyst for those who play their cards correctly to also earn credit card rewards on their purchases.
With interest rates so high accumulating daily, credit cards are never a good idea if you need a loan to keep up with.
They are incredibly expensive if you think of them as a loan facility.
This article first appeared in SingSaver.com.sg.