How Does A Line Of Credit Work?

First of all what is it and how it works is based on a pool of money available that an individual can borrow. Once approved for this line-of-credit the person can spend these funds, but will not pay or borrow interest until they have access to these funds. Below are some of the variations of lines of credit.

The Home Equity Lines Of Credit:

One of the more common types of lines of credit available to consumers would be an HELOC (home equity line of credit). With this loan type, the applicant’s home equity which is based on the value of a home that the person owns will serve as collateral.

These types of loans have gained popularity as they allow homeowners to borrow larger amounts of money at a lower interest rate when compared to unsecured loans or credit cards. The interest rate is typically lower as the banks will consider this loan to be safe on the assumption that the person will repay this line-of-credit to prevent losing their home due to foreclosure.

Home Equity Loan vs. Line Of Credit

The HELOC is somewhat similar to the Home Equity Loan, but there are a few substantial differences.

Typically the HELOC is regarded as more flexible when compared to the home equity loans because the borrower can request to borrow what is needed as well as a return to borrowing additional funds provided they remain below the maximum credit limit that has been stipulated.

With the home equity loans are also known as a “second mortgage,” the homeowner will only be able to access the entire loan amount in a single lump-sum and interest will apply to this loan balance. With the HELOC the homeowner will only be liable for the interest on the outstanding loan balance.

The Credit Card

A credit card is essentially already a type of line-of-credit which allows a person to borrow up to the maximum limit. This kind of loan allows the individual to repay and then re-borrow as many times as the like.

Draw And Repayment Periods

Any line-of-credit will involve what is known as the “draw” period and then the “repayment” period. At the stage of a draw period, the individual can borrow the money in the way of using their line-of-credit. This could be over a period of 10 years and feels and looks very similar to a type of credit-card account. During the stage of the repayment period, the individual repays the interest and principal on this loan.

The Closing Costs

Like the majority of other loan types, a line-of-credit will have what is known as closing costs. The closing costs need to be factored in when a person makes a decision on the loan type or lender.

Overdraft Lines of Credit

This version of a line-of-credit is available on a person’s checking account. These offer smaller loans when the person has spent the funds that are accessible on the checking account.