The decision to apply for financing is often an easy one to make. You need a significant amount of extra money for major plans, such as renovating the house or making great investments. While there are many types of financing solutions you can apply for to meet your needs, a personal line of credit may draw your attention. By learning more about this financing solution and how you can get one, you can better determine the steps you need to take next.
Bonus read – How to Apply for a Credit Card
Understanding Personal Lines of Credit
A line of credit is like a loan in that it gives you access to a large sum of money, but it is different in several ways. For example, with a loan, you get a lump sum of money. With a line of credit, you get access to a credit line, typically through a debit card or checks. You can make draws against the line of credit for a period of time. Then, you will have to begin making payments on the money you borrowed.
Limits and Amounts
You may wonder how much money you can borrow through a personal line of credit. The loan amount available varies substantially from lender to lender. It also depends on your credit score, debt ratio, and other related factors. Reasonably, however, the average borrower may obtain between $1,000 and $5,000 or more through a line of credit. If you tie your line of credit to your home, such as with a home equity line of credit or HELOC, you may obtain access to tens of thousands of dollars or more.
What Types of Lines of Credit Are There?
There are two main types of lines of credit that you can apply for. First, you can apply for an unsecured line of credit. This is one that is not secured by collateral, such as your home or other significant assets. Because there is no collateral, you can typically expect a lower loan limit and a higher interest rate. The other option is a secured line of credit. This uses collateral with the loan, and an example is a HELOC. You may have access to higher limits and enjoy a lower loan amount through a secured line of credit.
How to Apply for a Personal Line of Credit
If you have decided to apply for a personal line of credit, you may be wondering what steps you need to take. These steps will help walk you through the process.
- Review your credit report. This will tell you what your credit rating is, which will assist in helping you to find the right lender to apply with. In addition, if you discover that your credit scores are low or that some items are being reported in error, you can take the time to improve the situation.
- Determine if you have collateral that you want to use. You can research available equity in your home, car and other assets. Then you can determine if you have sufficient equity. You also need to consider if you want to place that item at risk. For example, if you apply for a HELOC and default on the loan, the lender can repossess the house.
- Shop for your lender and line of credit. Carefully research lender credit score requirements as well as loan amounts, collateral requirements, and interest rates. In addition, read consumer reviews to verify that the reputation of the company.
- Most lenders have an online application that you can use to officially begin the loan process. The lender typically will review the loan application and credit report initially. Then they will provide you with estimated loan terms. Review the loan terms and estimated monthly payment to ensure that the loan meets your needs and that it is affordable for you.
- If you agree to move forward with the loan terms provided to you, you may be asked to provide tax returns, bank statements, and other documents before the loan can close.
- After closing, the lender will provide you with checks or a debit card that are linked to your line of credit in most cases. You can begin using these items to make purchases immediately. Monitor your available credit limit regularly. Pay attention to the repayment start date so that you are not hit with an unexpected line of credit payment.
How Does Repayment Work?
After you have been approved for a personal line of credit, you generally will have a defined grace period when you can use the line of credit without incurring any payments. This period may be as long as six months or longer in some cases. Typically, your access to the line of credit will cease when the repayment period begins. However, this is not always the case. You should carefully review your line of credit terms. In this way, you understand when you will have access to the credit line and when payments are due. Some people will set up automated payments for their line of credit. These payments can vary in amount in some cases. Therefore, always pay attention to the payment amount due in order to properly budget for this expense each month.
FAQs We Know You Have
Many people have common questions about personal lines of credit. Here are some of them.
Q. Is the interest rate fixed or variable?
A. A fixed rate line of credit has a steady rate throughout the entire term. An adjustable rate may fluctuate based on market conditions. The interest rate options vary from lender to lender, giving you the flexibility to find the right rate type for your needs.
Q. Are there closing costs?
A. Most personal lines of credit do have closing costs tied to them. These costs can vary based on the type of loan that you apply for and the lender you choose to work with. Always ask your lender about closing costs before you fill out a loan application.
Q. Can I use the line of credit for debt consolidation?
A. In most cases, you can use a personal line of credit without limitations. This means that you can use the available credit line to consolidate debts as well as to renovate the house, pay for the kids’ college educations and more.
Q. How do I know if I should apply for a secured line of credit?
A. There are pros and cons associated with applying for a secured line of credit. For example, while you may enjoy a lower interest rate, you also run the risk of losing your collateral if you default on the payments. This is a personal decision, but if you choose to apply for a secured line of credit, bolster your savings account balance to ensure that you always have funds available to make payments in a worst-case scenario.
A line of credit is an excellent solution for those who need extra cash for various needs. It is important to understand how this is different from a personal loan and to learn more about the loan process before you apply. Ask your lender about specific questions you have to ensure that you make the best financial decision possible.