When getting a regular loan, the lender will give you the maximum loan amount in one lump sum. Line of Credits works a bit differently. There is still a maximum loan amount but the payment to you is made within an agreed period of time. This is usually ten years depending on what kind Line of Credit you use.
With your line of credit, there will be a draw period and the repayment period. During the draw period, you can draw money from the debit or the credit card issued by the lender for the line of credit. During the repayment period, you’ll pay off what you draw during the draw period. But you still will pay a small portion in the draw period.
The biggest pro of line of credit is that its flexibility. You can request a certain amount from the pool and pay it off when the repayment period kicks in.
Same as credit cards, most lines of credit are unsecured. So before getting a line of credit, your lender may require you to put in a deposit amount. This comes with an exception though. The home equity line of credit (HELOC) is almost always going to be secured by the equity as far as the borrower’s home goes.
It is much easier to get secured lines of credit as it provides the lender a better way to recoup in case of non-payment by the borrower.
Types of Line of Credit
There a few varieties of lines of credit but each will be in the category of either a secured or an unsecured. Other than these, a good example is the personal line of credit that works similar to credit cards but for cash purposes.
It is recommended to use this kind of line of credit for emergencies. Though it isn’t the only type of line of credit, getting approval for a personal line of credit can be challenging. Most lenders require proof of stable income, a credit score of 690 or higher. If your FICO credit score doesn’t cut it quite right, having a sizable savings account can also help.
Line of Credit for Business
Business owners can also benefit from a line of credit. Similar to the home equity line of credit, businesses might have to secure the LOC. But this isn’t a must. The lender is likely to evaluate the profitability and the market value of your business along with the risk taken by the business to decide on this.
The likelihood of getting a business line of credit is more about the size of the line of credit requested by the business and the evaluation of the things mentioned above.
Line of Credit Interest Rates
|Type of LOC||Interest Rate|
Interest can be — interest+principal
|HELOC||2.99% to 9.99%|
Home Equity Line of Credit
Perhaps the most common type of line of credit is the home equity line of credit (HELOC). A HELOC is generally secured by the market value of your home. The formula used in calculating the credit limit is quite simple.
Your credit limit is going to be equal to 75% of 80% of the market value of your home. If you have a mortgage on the home, you must subtract the balance owed on the mortgage when calculating your credit limit. The most attractive part of a HELOC is it usually has a long draw period.
In most HELOCs, the draw period is usually 10 years. During your draw period, you can have access to the funds. So you can draw money, repay and borrow again. Works similar to a credit card that grants you personal loans but way more flexible.
After your draw period ends, whatever you owe is due or the loan is extended to pay off the remaining balance over time. When it is time to close off your HELOC, you’ll have to pay a closing cost. The closing cost also includes the evaluation of the property used as collateral.
One of the reasons why HELOCs are becoming more popular is it is tax-deductible. If the funds are used to improve the property secured the HELOC, build, or simply buy, you can deduct the interest paid on HELOC. This was a recently introduced tax deduction after the Tax Cuts and Jobs Act of 2017.
HELOC Repayment Calculator
HELOCs are very popular but calculating the repayments is always rough. Most borrowers will start their repayments with interest-only loans during the draw period. Paying loan principals during the draw period is very crucial with HELOC. If you don’t repay any loan principle in draw period, when the repayment starts, you may have to pay large sums on your monthly payments.
As long as you know the HELOC loan amount, you can use this calculator to figure out our repayments.