What Are Lines of Credit & How Do They Work?
Contents
What Are Lines of Credit & How Do They Work?
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.
How Do Lines of Credit Work?
A line of credit has three main components:
- Credit limit – This is the maximum you can borrow on the line of credit. Limits often range from $1,000 to $100,000.
- Draw period – This is the period during which you can access the line of credit. Many lines of credit have draw periods of 5-10 years.
- Repayment period – After the draw period ends, you enter the repayment period where you can no longer borrow and must pay back the full balance. Repayment periods are often 5-10 years.
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.
What Are Lines of Credit Used For?
Lines of credit are commonly used to smooth out cash flow for variable expenses like:
- Inventory or supplies for small businesses – For example, a retailer uses a line of credit to buy inventory for different seasons
- Home improvements and emergency home repairs – A line of credit can fund a kitchen remodel or new roof if you don’t have cash saved up
- Medical expenses – If you have a health crisis and high deductible health insurance, a line of credit can help bridge the gap
- Legal expenses – Attorney fees and other legal costs can be paid from a line of credit
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.
Advantages and Disadvantages of Lines of Credit
Advantages
- Accessible funds for emergencies or peak business periods
- Typically lower interest rates than credit cards
- Only pay interest on what you use, not the full limit
- Flexible payments compared to installment loans
Disadvantages
Christine Twomey
2024-03-21
Just had my Divorce case settled 2 months ago after having a horrible experience with another firm. I couldn’t be happier with Claire Banks and Elizabeth Garvey with their outstanding professionalism in doing so with Spodek Law Group. Any time I needed questions answered they were always prompt in doing so with all my uncertainties after 30 yrs of marriage.I feel from the bottom of my heart you will NOT be disappointed with either one. Thanks a million.
Brendan huisman
2024-03-18
Alex Zhik contacted me almost immediately when I reached out to Spodek for a consultation and was able to effectively communicate the path forward/consequences of my legal issue. I immediately agreed to hire Alex for his services and did not regret my choice. He was able to cover my case in court (with 1 day notice) and not only was he able to push my case down, he carefully negotiated a dismissal of the charge altogether. I highly recommend Spodek, and more specifically, Alex Zhik for all of your legal issues. Thanks guys!
Guerline Menard
2024-03-18
Thanks again Spodek law firm, particularly Esq Claire Banks who stood right there with us up to the finish line. Attached photos taken right outside of the court building and the smile on our faces represented victory, a breath of fresh air and satisfaction. We are very happy that this is over and we can move on with our lives. Thanks Spodek law 🙏🏼🙏🏼🙏🏼🙏🏼🙌🏼❤️
Keisha Parris
2024-03-15
Believe every single review here about Alex Z!! From our initial consultation, it was evident that Alex possessed a profound understanding of criminal law and a fierce dedication to his clients rights. Throughout the entirety of my case, Alex exhibited unparalleled professionalism and unwavering commitment. What sets Alex apart is not only his legal expertise but also his genuine compassion for his clients. He took the time to thoroughly explain my case, alleviating any concerns I had along the way. His exact words were “I’m not worried about it”. His unwavering support and guidance were invaluable throughout the entire process. I am immensely grateful for Alex's exceptional legal representation and wholeheartedly recommend his services to anyone in need of a skilled criminal defense attorney. Alex Z is not just a lawyer; he is a beacon of hope for those navigating the complexities of the legal system. If you find yourself in need of a dedicated and competent legal advocate, look no further than Alex Z.
Taïko Beauty
2024-03-15
I don’t know where to start, I can write a novel about this firm, but one thing I will say is that having my best interest was their main priority since the beginning of my case which was back in Winter 2019. Miss Claire Banks, one of the best Attorneys in the firm represented me very well and was very professional, respectful, and truthful. Not once did she leave me in the dark, in fact she presented all options and routes that could possibly be considered for my case and she reinsured me that no matter what I decided to do, her and the team will have my back and that’s exactly what happened. Not only will I be liberated from this case, also, I will enjoy my freedom and continue to be a mother to my first born son and will have no restrictions with accomplishing my goals in life. Now that’s what I call victory!! I thank the Lord, My mother, Claire, and the Spodek team for standing by me and fighting with me. Words can’t describe how grateful I am to have the opportunity to work with this team. I’m very satisfied, very pleased with their performance, their hard work, and their diligence.
Thank you team!
Anthony Williams
2024-03-12
Hey, how you guys doing? Good afternoon my name is Anthony Williams I just want to give a great shout out to the team of. Spodek law group. It is such a honor to use them and to use their assistance through this whole case from start to finish. They did everything that they said they was gonna do and if it ever comes down to it, if I ever have to use them again, hands-down they will be the first law office at the top of my list, thank you guys so much. It was a pleasure having you guys by my side so if you guys ever need them, do not hesitate to pick up the phone and give them a call.
Loveth Okpedo
2024-03-12
Very professional, very transparent, over all a great experience
Bee L
2024-02-28
Amazing experience with Spodek! Very professional lawyers who take your case seriously. They treated me with respect, were always available, and answered any and all questions. They were able to help me very successfully and removed a huge stress. Highly recommend.
divesh patel
2024-02-24
I can't recommend Alex Zhik and Spodek Law Firm highly enough for their exceptional legal representation and personal mentorship. From the moment I engaged their services in October 2022, Alex took the time to understand my case thoroughly and provided guidance every step of the way.
Alex's dedication to my case went above and beyond my expectations. His expertise, attention to detail, and commitment to achieving the best possible outcome were evident throughout the entire process. He took the time to mentor me, ensuring I understood the legal complexities involved to make informed decisions. Alex is the kind of guy you would want to have a beer with and has made a meaningful impact on me.
I also want to acknowledge Todd Spodek, the leader of the firm, who played a crucial role in my case. His leadership and support bolstered the efforts of Alex, and his involvement highlighted the firm's commitment to excellence.
Thanks to Alex Zhik and Todd Spodek, I achieved the outcome I desired, and I am incredibly grateful for their professionalism, expertise, and genuine care. If you're in need of legal representation, look no further than this outstanding team.
- Approval depends on good credit so limits or denial are possible
- Accumulating large balance can be expensive long-term
- Paying only interest at first increases overall interest costs
- Need to be disciplined to minimize balance and pay back promptly
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.
Applying for a Line of Credit
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:
- Your credit score – scores above 670 have the best approval odds
- Your debt-to-income ratio
- Your employment and income history
- Your assets and collateral – secured lines require collateral like real estate
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.