As a shrewd money manager, you want to know all the ins and outs of a financial product before you borrow it. That is just smart — the more you know, the more likely you will find the best option available to you today.
So, how can you analyze a line of credit from all sides? This guide is here to help. Below, you will find some of the benefits of an online line of credit (or LOC, for short) before understanding the potential pitfalls of this loan.
3 Quick Advantages Of A Line Of Credit
1. It Is A Safety Net In Emergencies
How well do you think you can handle a slew of unexpected expenses? Let’s say your dog needs surgery the same month you have to pay a parking fine and repair your roof. Your measly savings account may only go so far until it dries up.
An LOC can give you peace of mind during these bad luck streaks, as you know you can dip into your funds to handle unexpected vet care and household repairs.
2. It Provides Flexibility
Let’s face it — there are plenty of financial products that provide safety nets in emergencies. A line of credit is unique in how often you can access these funds.
Unlike a traditional loan, an LOC allows you to borrow on a revolving basis. You can withdraw from your limit as much as you need, when you need it, and you can draw again as long as you pay off your balance.
This system gives you flexibility in those emergencies that don’t have a clear price tag — like a household repair that requires multiple attempts (and multiple trips to the hardware store) to fix. It even stays open after the dust settles, and you don’t have to make any more draws. You can keep your LOC on standby for the next emergency.
3. It Adds Credit History
Depending on your lender and its policies around sharing your payment history, you can use your LOC to build credit history. Making timely payments and maintaining a low utilization ratio (i.e., don’t max out your limit) demonstrates good financial management and can add positive entries to your report.
3 Quick Downsides Of A Line Of Credit
1. The Temptation To Overspend
Unlike other loans that have a clear and fixed end date, an LOC can stay open indefinitely, provided you pay back what you owe. This ease of access to funds can be too tempting to ignore. Plenty of people overspend with a line of credit at their disposal. If you do the same, you can throw off your entire budget paying back these extra expenses.
2. You May Pay A High Interest Rate
Like many borrowing options, an LOC doesn’t have a universal interest rate. The rate on your account may differ drastically from another person’s, depending on your location, lender, and creditworthiness. Generally speaking, people with low credit scores can expect to pay the most on their accounts.
3. The Potential To Fall Into A Debt Trap
The revolving nature of the LOC can lead to a never-ending cycle of borrowing and repayment. Without a clear repayment plan and disciplined financial habits, individuals may find themselves spiraling in a cycle of debt, paying high interest charges without making significant progress towards paying off the principal balance.
Many people manage to use these financial products without falling for this trap, and so can you. You just have to plan your purchases to ensure you can afford to pay them back as soon as possible.
Credit Line Conclusion
Getting to the bottom of this guide is another great way to avoid a debt spiral. Now you know the pros and cons of a line of credit, you are in better shape to choose one wisely.
