Finance 101: What Exactly Is a Line of Credit?

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(Newswire.net — April 27, 2021) — With America on the cusp of opening up once more, it’s important now more than ever for adults and business owners to be well versed on their finances and financial options. It’s a time for us all to look toward the year ahead with a hopeful eye and a prepared frame of mind – and that means being aware of how you can obtain money when the need arises. 

Whether for personal reasons or to help kickstart a business in 2021, it pays to be informed. Today we’re building on that principle by diving into credit – particularly, lines of credit. Let’s get right to it and look at what a line of credit is and what it could mean for you or your business. 

What does it mean?

Simply put, a line of credit is a loan – typically a flexible one – that you obtain from a bank or some other kind of financial institution. Think about it like a credit card, in that you can apply for a line of credit and receive a specified amount of money that you’ll then repay over time at a schedule arranged with your lender. 

A key point to keep in mind where lines of credit are concerned is that you’ll be paying some number of Dollars in interest as the repayment period of your credit continues. Lenders, brokers, and banks will always confirm this explicitly with you before your credit is confirmed – if you’re successful in your application according to their lending criteria. Keep in mind, however, that the rate of interest on your loan might be variable, meaning you’ll only be able to get a prediction of interest rates when you request your line of credit. 

Why would I need one?

The flexibility of a line of credit is key. Generally speaking, you’re unlikely to use a line of credit for a major purchase like a house or a new automobile; there are specific kinds of loans that cater to that market and need. Instead, a line of credit is helpful for a variety of other reasons where flexible access to a few extra Dollars is important to the applicant. 

Particularly true for the self-employed and business owners is the fact that income varies month to month. Sometimes you’ll have a great period of business and earnings, but you might find yourself in trouble in the next financial quarter. This is a common scenario where a line of credit can help get you access to the money you need while tending to have a lower repayment rate than something like a credit card.

Are credit checks involved?

Yes. Because a line of credit is usually an unsecured loan – one where the loan isn’t guaranteed against an asset like a house or car – you’ll be evaluated on a set of criteria that will include your credit rating. This is typical of any unsecured loan.

It’s important to keep in mind that, while providers of lines of credit tend toward similar criteria, every lender is unique in its approach and specifications. If you have a poor credit score, you might find yourself refused by a lender or multiple lenders. This could affect your credit score further. If you aren’t sure about your score and are concerned about the impact an unsuccessful application might have on it, it’s best to speak to the lender you are considering directly to clarify the situation and potential consequences. 

And that’s it! Simple

A little information goes a long way. Learning about lines of credit and how they interact with your own credit score is an important thing to pick up. We hope you’ve found this quick article informative and useful. Here’s to a better year ahead!