Line Of Credit Loans: A Safety Net For Unforeseen Financial Needs
Building a safety net is essential if you want to stay ahead of any potential financial needs that may occur. Even if you or your business are currently not experiencing any financial issues, it’s always better to be prepared in case of any unforeseen events that could impact your finances. One way to achieve this is by applying for a line of credit.
Keep reading as we cover this type of loan in more detail below, and learn more about their features and benefits.
Understanding Line Of Credit Loans
A personal or business line of credit loan can be a strategic financing option to manage ongoing and unforeseen cash flow needs. When needed, it allows you to borrow up to a predetermined amount, either in one single payment or in smaller instalments up to the agreed-upon total.
Lines of credit may be secured or unsecured. With a secured line of credit loan, you must provide personal possessions as security for the loan. In the event that you’re unable to repay the borrowed loan, the lender may seize the asset.
In contrast, for unsecured credit lines, you don’t need to provide collateral. On the other hand, an unsecured line of credit sometimes has smaller credit limits and maybe higher interest rates compared to a secured credit line.
Overall, a line of credit provides you with access to a certain amount of funds, much like a credit card. You can draw money as much as you need from your line of credit at any time, and you won’t have to pay interest on the entire loan, only on the amount borrowed.
Key Features
Credit Limit
One of the most distinctive features of a line of credit loan is the credit limit. This is the amount up to which you may withdraw funds for your needs. When borrowing, it is essential to be mindful of the limit.
As long as you stay within the credit limit, generally, you can withdraw as much or as little as you want.
Revolving Credit
Your line of credit can revolve over a predetermined amount of time, depending on your arrangement with the lender. When you repay the available money on a revolving line of credit, you can use it again without having to reapply to your lender.
This is why we refer to these loans as revolving credit. With a revolving credit, you can always have a steady cash flow to cover any expenses as they arise.
Interest Rates
Another feature that makes line of credit loans different from other types of loans is their interest rates. Unlike term loans, which provide borrowers with a set lump sum of cash and interest that is also set, lines of credit only charge interest on the amount you withdraw and not the credit limit.
The interest rate can be fixed or variable. Fixed rates, as the name suggests, are set and remain the same throughout the entire loan period. On the other hand, variable rates can change throughout the loan term.
Fixed interest rates generally offer more stability as they remain the same no matter the market changes. However, with a variable rate, you may benefit from savings if the interest rates are lower during your loan.
Flexibility
Lastly, a line of credit can provide your business with flexibility, which is vital for financial growth. With a line of credit loan, you have funds available whenever needed.
For example, if you have a late bill or a sudden, unexpected expense, with a line of credit, you will have the money to pay it immediately. In other words, a line of credit means having a constant stream of cash whenever you may need it.
Benefits Of Line Of Credit Loans
Line of credit loans provide borrowers with plenty of benefits including:
- Contingency fund access: Instead of worrying about where you will get the money from should an unforeseen event happen, with a line of credit, you always have an amount of funds available.
- Interest savings: If your line of credit loan has a variable interest rate, you may benefit from interest savings if they go down throughout your loan. Also, as we mentioned, you only pay interest on the amount you borrow and not the full credit limit.
- Financial cushion: Having a fallback is always a smart idea. A line of credit can provide you with sufficient financial security so you don’t have to stress in case of unexpected expenses.
- Flexible repayment options: Lines of credit are great as they typically provide borrowers with flexible and affordable repayments. Best of all, you only need to pay back what you borrow instead of a set monthly payment.
Common Uses Of Line Of Credit Loans
Cash Flow Management
You may utilise a line of credit loan to manage business expenses or personal finances during periods of low income. Unforeseen circumstances, like seasonal fluctuations for businesses or running out of funds until your next pay-check, may be mitigated when you have a financial cushion.
Debt Consolidation
If you have outstanding debts, you may utilise a line of credit to combine them into a single payment with potentially lower interest. This can help you improve your personal or business credit score while securing the necessary funds.
Improving your credit score, in turn, may lead to you being offered more favourable rates and terms on future loans.
Large Purchases
You may also use a line of credit loan to fund significant expenses like education or travel without depleting your savings. Instead, keep your savings untouched while financing these expenses with a credit line.
Conclusion
Line of credit loans can be an excellent financial option for business owners looking to build a safety. Due to their revolving nature, lines of credit generally allow you to borrow, repay the borrowed amount, and borrow again time after time.
If you are interested in learning more about this type of loan, we’re proud to offer the best Business Line Of Credit in the market. Our award-winning finance solution provides small business owners full flexibility at zero risk, with no ongoing or hidden fees. So, you can utilise our flexible revolving Line Of Credit as a safety net to manage cash flow effectively and grow your business.
