When a bank provides a client with a personal line of credit, it does so with the understanding that the funds will be used for various reasons. For some individuals, the money will be used to finance their latest spending spree or be a source of insurance when it is needed. Regardless of how the money will be used, the bank will always profit from offering the financial product.
As a potential or current user of a personal line of credit, do you know how to best manage it without paying extra fees and interest? Below are 9 basic things that you should know before spending a dollar from the source of financing.
1. Lending range
Banks have various lending ranges that clients can select from for their individual purpose. Although clients can apply for a maximum amount of money, banks do have the final say in terms of the amount that will be made available. By using clients’ credit reports and other analysis tools, banks will decide the appropriate lending range to insure that the credit is repaid in a timely fashion.
2. Interest rates
Interest is charged to clients who choose to access money from their line of credit. Similar to mortgage rates, interest rates can be fixed or variable. It is best to discuss with a bank representative which option fits your ability to repay (the money) and not go into further debt. Usually, interest rates for lines of credit are usually lower than they are for credit cards—even low-rate credit cards—personal loans or other short-term loans.
3. Fees
When using a personal line of credit, clients must keep in mind the associated fees attached to the source of funds. To generate more profit, banks may charge an unused line fee, often an annualized percentage fee on the money not withdrawn. (Ask your bank representative to explain all applicable fees that come with your line of credit.)
4. Type of personal line of credit
Personal lines of credit can be classified as either secured or unsecured. Secured personal lines of credit are backed with your property or investments and typically result in a lower interest rate and higher credit limits. Unsecured lines are not supported by any type of collateral and thus result in a higher interest rate. Banks will allow clients to select which type is best for them given their financial situation.
5. Repayment options
Unlike a personal loan or mortgage, clients must repay the money (plus interest) that they use used for the line of credit. For example, if a bank grants a client a line of credit of $5,000 and the client utilizes $2,000, the bank should expect $2,000 plus interest to be back in its coffers in a pre-determined period of time. Clients must make at least a minimum payment on their balance every month.
6. Re-applying
Banks have different policies when it comes to re-applying for a line of credit based on a client’s credit history. If there are no issues with a client’s credit history, banks will waive the application process and make the lending range available immediately.
7. Monthly statements
Whether it be by mail or on the web, clients can keep track of the amount of money that’s available in the line of credit and how much they owe.
8. Insurance
In the event that clients die or become disabled, there might be a need for insurance to cover their line of credit. This may be the case for clients that have large unsecured lines of credit that have not been paid down in a timely fashion.
9. Negotiation options
When it comes to obtaining the financial product, everything is negotiable. Whether it be lending range, interest rate or term, individuals have the power to dictate what they need from a personal line of credit due to the fact that there are various financial institutions to obtain the source of credit. All that’s required for a successful negotiation is knowledge of what is available elsewhere and knowing what is needed to suit respective needs.
A personal line of credit is an alternative source of money that banks do not offer for free. It is the client’s responsibility to manage this specific source of funds to ensure that the minimum amount of interest and fees are paid on time.
