Business and life are uncertain, and some days come out to be worse than the others when you’re low on finances. Money was never meant to stay in one place, and it is evident that money doesn’t grow with the speed that we spend it. Hence, finances can run short if proper management lacks.
Often, business people need external financial help to keep their business afloat. The most common method of getting financial help is to get a loan. Taking a loan from a bank does help you, but then you see the clouds of depression when it is time to repay the bank. Sometimes the case is different when you have the money from the bank, but you won’t be putting all of it to use. The money stays there, but you have to pay interest on the whole amount the bank has dispersed to you.
So, what does a person do to stay away from unnecessary costs? Take a line of credit from the bank.
What is a Line of Credit?
To understand the concept of line of credit (LOC), you must understand the workings of a credit card. When the bank or the credit card company issues a credit card, they allow you to spend a fixed amount of money every month on credit. At the end of a month’s term, you’re supposed to pay the amount spent, to the bank. Failing to do so results in the increase of interest in your expenditure. In the same way, when you have the benefit of a line of credit, the bank provides you with a fixed amount of credit from which you can withdraw money as per your needs. Once you have fully repaid the amount you spent, your credit taking ability gets replenished.
Your line of credit is like a revolving bank account with an expiry date or open-ended credit. A line of credit gives you the freedom of taking credit from the bank at any time without any fixed amount forced upon you by the bank. When you’ve paid your creditors back, including the interest in your withdrawings, you can again withdraw the same amount from your account. There are some banks which actually provide a timeline for you to utilize your credit money. At the end of this timeline, you must pay all your dues with the added interests. The bank generally advises making a minimum payment every month to prevent penalties and additional charges.
How does a Line of Credit Differ from Terminal Loans?
Differentiating between terminal loans and lines of credit needs a look at the requirements that call out for a loan or a line of credit. Loans are a credit option for people looking for long-term investments or are taking a loan for a big project. A line of credit, on the other hand, makes it clear that it is meant for short-term credit needs such as workplace renovation or the payment of urgent bills. There are more factors to consider when comparing loans and lines of credit.
The most common factor of differentiation are the interest rates of terminal loans and lines of credit. In the case of a terminal loan, the interest always remains a fixed percentage of the whole loan amount. The amount of money you borrow through a terminal loan decides the amount of interest on the same. Whereas in the case of a line of credit the bank gives you a fixed amount out of which you can withdraw money for expenditure and pay interest only on what you withdraw from the credit account.
In the credit market, the interest rate on a business loan is generally higher and fixed than that of credit lines, because lines of credit have a variable rate of interest. LOCs allow preference of withdrawal which determines the rate of interest on the buyer’s debt. Although, in some credit lines like the home equity lines of credit or HELOC may have additional interest percentages. In such LOCs, where assurance is a necessity, the closing cost of the account may be added for the appraisal of the property on collateral. There are also unsecured credit lines in the market that do not demand assurance for the borrowed money. But, the interest rates of such lines of credit are higher than the rest.
Terms of Payment
Although loans and lines of credit are different when it comes to extracting interest rates, they both charge monthly payment of installments. The whole difference in the payment method is determined by the fixed interest rate of a terminal on the whole loan amount. This gives credit lines a big advantage as the interest is only charged if an amount is withdrawn from the account. This means that if you have not spent a penny for two months after paying your dues, you don’t have debt for the month.
Loans and lines of credit, both provide credit services as per the person’s requirement. Before borrowing money through any credit service, you must first analyze where the money will be spent and how long can you take to clear your dues. A line of credit is very convenient, but it also has the risk of uncontrolled spending. So, you must never use your line of credit for a lavish living but the development of your business or workplace.
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