The requirements for a line of credit depend on the type of loan you need. If you need a one-time personal loan to fund an equipment purchase for your business, then a line of credit may not suit your needs. If you decide to apply for a credit line, you should understand how it works and who offers this type of financing.
A Closer Look At Lines of Credit
A line of credit is an arrangement between you and a financial institution that allows you to access funds at any time from a loan balance. The main difference between a regular loan and a line of credit is you do not receive a lump sum payment from a credit line. Instead, your financial institution allows you to withdraw money from your line of credit so long as you do not exceed the maximum available amount and you meet your bank’s financing requirements. In some cases, your financial institution allows you to adjust your repayments based on any adjustments in your income. With a personal loan, financial institutions typically do not allow you to adjust your payments.
Secured and Unsecured Lines of Credit
When you decide to apply for a line of credit, you must know the difference between the two types of credit lines. First, a secured line of credit uses an asset, or collateral, to secure the credit line. If you do not make payments on time, your financial institution can seize the collateral that backs the line of credit at any time. Most borrowers opt for secured lines of credit or loans when their credit scores are low or they have a limited borrowing history that proves they are worthy to borrow money.
An unsecured line of credit does not have collateral to secure the credit line. Most borrowers must have strong credit scores with a proven ability to repay debt before financial institutions approve them for unsecured credit lines. If you have a strong credit score, then your approval odds for a line of credit are pretty high. Most banks and financial institutions consider scores above 720 as good credit.
A line of credit is a good option if you do not know how much money you need upfront, but you do have repeated cash payments for business or personal use. Although lines of credit work in a similar way to credit cards, you do not need a card to access the funds. In most instances, lines of credit charge lower interest rates than credit cards.