There are more ways to access credit than the classic fixed-term personal loan. A line of credit can offer an alternative to borrowers looking to raise money without traditional restrictions.
Unlike a traditional loan that sees interest charged on the loan balance, your line of credit lender will only charge interest on the credit that you have used. This makes a line of credit a competitive option for those looking to access funds for something like a home improvement or a family vacation without the added debt that personal loan payments can entail.
What are the types of lines of credit?
There are several ways to use a line of credit; as an alternative to a personal loan, as an alternative to a car loan or as a home equity loan.
Unsecured line of credit
A personal loan allows borrowers to access the funds they need (typically between $ 5,000 and $ 100,000) and repay them over a specified period (typically up to 5 years). A Insecure a line of credit or overdraft may be more attractive to those looking to avoid fixed repayment terms and costly interest charges. Because a line of credit means you will only pay interest on the amount of credit you access, as opposed to a full personal loan amount, it can be more economical in certain financial circumstances.
Home equity loan
A secured line of credit, also known as a home equity loan, is a flexible loan that acts like a credit card. A home equity loan is one way to reduce the equity in your home loan, and it’s typically used for personal loan purposes, like paying for renovations, medical bills, urgent repairs, weddings, and vacations.
What is a line of credit loan?
What can you use a line of credit for?
Just like a loan or a credit card, you can use a line of credit to access funds for a variety of personal reasons. The good news is, you don’t need to have this goal approved by the lender before you apply.
Some Australians can use a line of credit to pay:
- To buy a car
- Home renovations
- Tuition and fees
- Medical bills
- Veterinary invoices
- Dental work
- Legal cost
The limit is up to you. If you can prove to the lender that you meet the eligibility criteria, that you can manage a line of credit responsibly, and that you are unlikely to miss repayments, you may be able to get a line of credit.
Some homeowners may use a home equity loan to access the equity in their mortgage to pay for home renovations and improvements. These improvements can then further increase the value of the home, thereby increasing the home equity level.
What alternatives to a line of credit are available?
The two main alternatives to a line of credit are a personal loan or a credit card. It may be helpful to assess whether either option may be better suited to your financial situation.
- Personal loans – A personal loan can help borrowers in need of cash access funds to repay over a specified period. It can be secured by an asset, potentially resulting in lower interest, or unsecured. The main difference between this and an unsecured line of credit is the ability to secure the loan, as well as the concept of loan term, that an unsecured line of credit will not have.
- Credit card – Since a line of credit basically acts like a credit card, only with lower average interest rates, it may be worth considering low-rate credit cards or interest-free credit cards. These types of credit cards can allow you to pay off that big item while avoiding high interest charges. Just keep in mind that if you go for a card with an interest-free window, if you don’t pay the balance within the allotted time, you will be charged a return interest rate.
Scenario: Jane wants to renovate her house
Jane has lived in her house for several years and decided it was time to renovate. She does not have all the funds available, so she is thinking about her financing options
Here are three potential ways to finance her home renovations, assuming her finances are in order and she meets all the eligibility criteria:
|Possibility of financing||Choice in financing option||How interest is charged||What to keep in mind|
|Credit card||Low rate credit card
0% credit card purchase interest
|You can pay interest on what you spend.||Low rate credit cards will, on average, charge less interest on the amount you spend.
0% interest purchase credit cards will not charge you interest until the interest-free period is over.
Credit limits put a cap on how much you can spend. If you are looking to spend a lot, keep the credit limit in mind.
|Personal loan||Secure personal loan
Personal loan without guarantee
|You pay interest on the full amount of your loan.||Secured loans require collateral and in most cases can have a lower rate than unsecured loans.|
|Credit line||Home equity loan
Unsecured line of credit
|You pay interest on what you spend.||Home equity loans allow you to reduce the equity in your property, with the property being used as collateral.
An unsecured line of credit acts like a credit card, but can be used for personal loan purposes.