If you’re thinking of applying for a line of credit, there are a few things you need to know. First, it’s an excellent idea. It can build your credit, sponsor important investments, and help you start a business.
And if you’re worried about the potential drawbacks, don’t be. We’re about to explain all you need to know about applying for a line of credit so there’s nothing to worry about.
Namely, we’ll explain in simple terms exactly what a line of credit is and how it works. Plus, we list the most important benefits of opening a LOC. Read on to learn all about it.
What Is a Line of Credit?
A line of credit is a type of loan. It is a system of borrowing money that works out very well for all parties involved.
The borrower gets the money they need right away, plus an affordable way to pay it back. The lender gets to make a low-risk investment and collect any interest owed. Everybody wins!
How Does It Work?
To name a familiar example, credit cards are a type of LOC. You can also think of a LOC as the opposite of a checking or savings account.
With a checking account, you deposit money into it and then take it out when you need to use it. The amount you can take out is limited by what you put in.
With a line of credit, the money you take out is not yours. It’s money that you are borrowing from the lender or creditor.
Thus, you don’t have to put any money into your LOC account before you use it. Instead, you borrow the money first and then pay it back later. With a line of credit, your limit is the maximum amount that the creditor trusts you with.
What Are the Advantages of a Line of Credit?
Speaking of trust, do you know how to build the trust of creditors so that you can increase your borrowing limit? It’s called “building credit” and you do it by borrowing money and paying it back on time.
In other words, getting and using (and paying back) a line of credit is one of the many ways you build your credit rating. And improving your credit score is a key requirement for making big investments, like buying a house.
And speaking of investing, that’s a great use for your line of credit, too. For example, imagine that your house is in desperate need of repairs but you don’t have the money. Your line of credit can front you the money and give you plenty of time to pay it back.
Can LOC Boost Your Startup Business?
Besides personal LOCs, there are LOCs for businesses, too. These work great as a loan to start your business or as an emergency fund down the line. They’re also good to have so you don’t miss a chance to make any business investments that suddenly become available.
Repayment Procedure of a LOC
Repayment agreements vary based on your lender and your credit rating. But, basically, they work like this.
You have a minimum amount to repay each month. Any unpaid balance left over at the end of each billing cycle will accrue interest.
Usually, this interest is calculated based on an annual percentage rate (APR). Also, there’s typically no interest earned if the total balance is paid before the end of the billing cycle.
Remember This Guide When Applying For a Line of Credit
Applying for a line of credit is one of the most financially beneficial things you can do. So get started now. Start comparing creditors near you and open up a personal or business line of credit.
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