A line of credit is a type of loan that allows you to borrow money up to a pre-approved limit. It works similarly to a credit card in that you can access funds as needed, pay it back, and then borrow again without having to reapply. Lines of credit are useful for managing cash flow for expenses that fluctuate.
A line of credit has three main components:
To access funds, you make a “draw” up to your credit limit and the lender deposits the money into your bank account. You will only pay interest on the amount you draw, not the full credit limit. Payments are flexible, but at minimum you make monthly interest-only payments until the draw period ends. Then you enter the repayment period where you pay back the full balance with principal plus interest.
Lines of credit are commonly used to smooth out cash flow for variable expenses like:
Using a line of credit allows you to pay for larger expenses over time rather than all at once. This helps manage cash flow and preserve the funds in your bank account.
Overall, lines of credit provide flexible access to funds as needed, making them useful for managing variable financial needs. But they can also tempt overspending so discipline on minimizing the balance long-term is important.
Banks, credit unions, and online lenders all offer lines of credit. Rates and terms vary significantly, so compare multiple quotes. Approval and credit limits depend on factors like:
Many lenders let you get pre-qualified to see offers with a soft credit check. This helps you compare options without impacting your score. Then you submit a full application for formal approval once you select the best line of credit for your needs.
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