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What Is a Line of Credit? What You Need to Know

A line of credit is a type of loan that’s almost similar to a credit card. You have a specific amount of money (such as a credit limit on credit cards) that you can use as needed for any purpose.

In most cases, you’ll have to use your home equity to borrow this kind of loan. Typically, your home or other assets can be used as collateral in the loan agreement. In this case, the creditor can repossess or sell the property if you default. But you can also get an unsecured line of credit, which is based on your income, credit score, and employment.

Before you apply for this type of loan, it helps to know what it’s all about.

What Is the Difference Between a Loan and a Line of Credit?

The main difference between a personal loan and a line of credit is how you get the borrowed amount and the repayment terms. With a loan, you get a lump sum of the borrowed amount and a fixed repayment period.

In a line of credit, you basically get a revolving account. You can use the account indefinitely if you adhere to the creditor’s conditions at all times. As long as your account has funds, you can draw, repay, and redraw.

Does a Line of Credit Affect My Credit Score?

A line of credit is likely to affect your credit score if your credit profile is deemed risky by lenders.

Basically, before applying for a line of credit, you need to check your credit rating. Also, be sure you have minimal recent credit as possible.

As long as you meet the minimum payments and follow the creditor’s terms, your credit score is likely to stay safe.

What Is a Good Rate for a Line of Credit?

Before you apply, bear in mind that line of credit usually come with variable interest rates, but they’re generally tied to a benchmark rate. How you withdraw money from your account will determine the interest you’ll pay.

Interest rates range between 3.5 percent to 7 percent — the lower the rate, the better deal for you. However, bear in mind that it’s variable. So, it’s likely to change several times during the loan period. It can work to your favor if the rate drops.

In this case, your repayments and loan cost are unpredictable. The good thing is that interest is only charged on the outstanding balance (the money you have used), and not the amount you borrowed.

What Are the Requirements?

Just like borrowing regular loans, there are fundamental requirements you must fulfill to get approved for a line of credit.

You must be at least 18 years old and an Australian citizen or a permanent resident. Creditors will need your financial details, such as income, expenses, assets, and outstanding debts. They’ll also need to verify your identity so you must provide your driver’s license, passport, or Medicare card.

You also need a great credit score to get approval from most creditors.

How Do I Get a Line of Credit?

It’s easy to get a line of credit when to take the time to compare different creditors. As long as you meet the creditor’s requirements, you’re eligible for a loan.

If you want a secured option, be sure to know the value of your home or asset. Most lenders usually have a minimum and maximum amount for these loans. For example, some allow a minimum of $10,000, and they can go up to 90 percent of the value of your home.

Or, you can go for an unsecured line of credit, but the maximum amount is usually lower, say like $50,000. The minimum can be about $4,000.

Remember to check the fees involved in the loan, too. Some lenders have an application fee, which can be as high as $600. Other charges include valuation, account keeping, discharge, and loan settlement fees.

When you’re sure about the details, you can go ahead and apply for the loan.

Final Thoughts

A line of credit is a viable option if you want a flexible loan to help you manage your cash flow. You’ll be able to access money as needed, giving you a safety net when you’re tight on funds.

When looking for one, be sure to take the time to compare different creditors and the rates they offer. Keep in mind you can opt for a home equity line of credit (HELOC) or personal line of credit (PLOC). Whatever your option, be sure to choose the best deal possible.

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