Generally speaking, a line of credit, or credit line, is a type of revolving loan facility that you can access at any time. Here, we explain exactly how it works and how you could potentially benefit from it.
What is a line of credit?
In a nutshell, a line of credit is a flexible loan offered by banks and other providers that gives you access to funds whenever you need them.
You’ll be able to draw on these funds as and when required up to a maximum amount and over a set period of time. Interest is charged on the amount borrowed, but not on any funds you leave untouched.
This makes a line of credit particularly beneficial if you’re carrying out home improvements, for example, and you’re unsure what the total cost will be. You simply draw on your funds when you need to and if the total cost is lower than anticipated, you won’t pay interest on the funds you haven’t used.
How does a line of credit work?
A line of credit works differently to a standard loan. With a standard loan, your lender agrees to let you borrow a fixed sum of money that you repay in monthly instalments, plus interest, within a set term, and you would need to go through the whole application process again if you needed more funds, which isn’t always guaranteed.
A line of credit, on the other hand, is much more flexible and enables you to have access to cash when you need it, up to your credit limit. You can borrow as little or as much of the available credit as required, and you only pay interest on that amount. Borrowers can draw on their funds within 5 years, known as the ‘draw period’.
After this, your HELOC reverts to a standard term loan which means you can no longer borrow against your line of credit and must repay the amount owed in monthly instalments before the end of the term.
Many lines of credit loans will allow you to repay the amount borrowed earlier than planned without charging a penalty fee.
Secured vs unsecured lines of credit
In a similar way to traditional loans, lines of credit can be secured or unsecured.
A HELOC, or a home equity line of credit, is a type of secured credit line as it allows you to borrow against the equity you’ve built up in your home. The loan is secured against your property which means your home is at risk if you cannot repay your loan.
In comparison, an unsecured line of credit does not require you to use an asset as collateral. However, because the lender is taking on more risk (as it has no guarantee of getting its money back if you can’t keep up with repayments), interest rates on unsecured lines of credit tend to be higher compared to secured options.
Is a credit card a line of credit?
Credit cards are similar to unsecured lines of credit. Both are a revolving line of credit, but the key difference with a credit card is that there is no draw period. You can simply borrow up to your allocated credit limit for as long as the account is still open.
What’s more, if you repay your balance in full and on time each month, you can avoid paying any interest at all. Many credit cards also offer rewards or cashback as you spend.
How do I qualify for a line of credit?
As with any form of borrowing, you’re more likely to get accepted for a line of credit if you have a good credit rating. Having a steady job and comfortable income will also improve your chances.
If you apply for a secured line of credit such as a HELOC, you will also need to be a homeowner to be eligible, and your property may need to be above a certain value. Always check qualifying criteria carefully before applying.
What line of credit interest rates will I get?
Again, this will depend on your credit rating and whether your line of credit is secured or unsecured. The best line of credit rates will usually be reserved for those with excellent credit scores. Secured lines of credit also tend to offer lower interest rates compared to unsecured. The rate you’re offered will depend on your individual circumstances.
How do I apply for a line of credit?
With Selina Advance, you can get an instant quote in less than two minutes. You can then submit your application on the online portal, where you’ll need to supply details about yourself and any co-applicant, plus details about the property, your credit commitments and household expenditure. Your personal adviser will then contact you to discuss your application and make a product recommendation, free of charge.
What can I use a line of credit for?
You can generally use a line of credit however you wish but there may be restrictions on activities such as gambling. Popular ways to use funds include:
- Home improvements
- A holiday of a lifetime
- New car
- School fees.
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