A line of credit refers to the limit or extent to which you can access a loan amount. It refers to the limit to which you can get a loan at will. Financial institutions offer lines of credit by providing flexible loans that you can access and payback in the agreed amount of time.
Various lines of credit allow you to access loans within your limit and avoid accruing huge amounts of interest on it.
The Different Lines Of Credit You Can Receive
Unsecured Line Of Credit
This refers to an amount of loan you can get from a financial institution that does not require you to give your assets as a loan guarantee. Therefore, the value of assets does not matter when taking a loan.
You can take any amount of value within your limit. The interest rates are high due to the risk of default.
Security Backed Line Of Credit
This line of credit is more limited than the unsecured LOC because it requires some collateral for any loan you take from the bank. You can use an asset like a house as collateral for your loan.
The interest rates for the secured line of credit are lower than that of the unsecured because of your collateral.
Personal Line Of Credit
Personal lines of credit do not require you to give any collateral if you want a loan. However, it requires you to have a good credit score that is above 670. You can work out a flexible payment plan in a personal line of credit depending on your loan amount and financial capability.
In a personal line of credit, you can acquire a loan of between $1,000 and $100,000 and its use is not restricted. However, the interest rates are relatively high due to the absence of collateral when borrowing.
Home Equity Line Of Credit
A home equity line of credit is a type of secured line of credit because it refers to the amount of loan you can access by putting up your home equity as the loan collateral. Therefore, the amount you can take out as a loan in a bank cannot exceed your home value.
With a home equity line of credit, you can only access up to 85% of your home equity value minus any amount of money you owe for it. With home equity, you only pay back the money you use, and defaulting to pay it can result in you losing your home.
It is, therefore, riskier for you than other forms of lines of credit.
Business Line Of Credit
This line of credit is especially beneficial to small business owners. It is an unsecured line of credit; therefore, you don’t need to provide anything as collateral. Small businesses can be quite risky and unstable.
This line of credit allows you to take some money to fix different money needs in your business as it grows. You only need to pay the borrowed money on this line of credit.