There are instances wherein it is more practical to take out a loan rather than paying with a hefty sum of cash upfront, such as when purchasing a new home or buying a new car. It is in these instances wherein you need to venture out on the most suitable type of loan for your needs. You might even consider a line of credit, which is somehow different from the other types of loans.
Line of Credit
A line of credit is an account that allows borrowers to use up a certain sum of money within a particular limit set. Credit cards are the most common example of a line of credit system wherein credit cardholders are allowed to use up their cards for purchases within their credit limit. Once they repay the money they used up, the money will reflect on the amount that they can once again borrow.
Apart from a credit card, there are other forms that implement a line of credit system. There are home equity lines of credit (HELOC), as well as a business line of credit. A home equity credit may be an appropriate option if you intend to renovate your home, while a business line of credit is a great source of emergency funding for your business activities.
For many individuals, taking out a loan means paying the principal balance awarded in monthly installments. In a typical loan system, lenders give the borrowers with a lump sum that they can repay in equal payments, together with the interest, in monthly installments. People tend to take out loans to pay for big purchases that will be difficult to pay outright.
Line of Credit vs Loans
Lines of credit are most appropriate for small but unanticipated expenses to even out the income cash flow. For instance, an enterprise may need to use a business line of credit to finance an unforeseen business expenses such as a damaged equipment. On the other hand, loans are taken out for considerably larger but one-time purchases. Apart from home or car purchase, some individuals even take out loans to invest in the stock market.
While both lines of credit and loans charge a certain interest for the amount of money used up or borrowed, lines of credit often apply variable rates which are normally based on the current market conditions. Loans, on the other hand, often implement a fixed rate, depending on its term or duration.
This is often true regardless of the type of loan, such as a personal loan, a home equity loan, or even a small business loan. Thus, the interest rates implemented by these two methods of funding can be deemed as the notable difference.
A line of credit may prove to be more appropriate in some instances compared to other types of loans. A line of credit is usually more manageable because it sets a certain limit for the borrower. Nevertheless, the best funding will still be dependent on your needs and preferences.