Line Of Credit Basics For Beginners

A line of credit is a pre-approved amount of money that can be used and paid at a later date. The payments can be arranged as installments or a single lump sum payments. Lines of credit offer flexible payment options for many types of uses.

Most lines of credit require that the borrower offer collateral and security for the loan. Common forms of collateral accepted by banks for lines of credit are a home or investment property.

A line of credit will require you to pay the interest on the money that you actually borrow or use. Lines of credit are typically accessible for 5 to 10 years and then become fully amortized loans. After 5 or 10 years, the borrower is only allowed to pay back the loan and is not allowed to take additional money. Many times interest rates on lines of credits will be variable and may change over time. However, for the most part, they are lower than credit cards.

Lines of Credit and Associated Costs

While a line of credit will generally offer lower interest rates, most will impose service fees. Service fees may be monthly or annual fees. Also, some lines of credit may charge inactivity fees for lines of credit that are not used for extended periods of time.When searching for a line of credit, you should always inquire about miscellaneous fees or charges that may be associated with a line of credit.

Common Uses for Lines of Credit

A line of credit can generally be used for any purpose. They are popular with property investors. For people that invest in rental properties or purchase homes and then resell them, lines of credit can be a valuable financing option because it gives them access to capital to purchase a home. By having a pre-approved amount already reserved, investors can confidently enter into property transactions. Furthermore, lines of credit are excellent financing resources for people that purchase homes and then renovate and rent them. The line of credit helps them repair the home and maintain the payment, while the property is being repaired.

Lines of Credit and Income Taxes

As with many other types of loans, the interest that is paid on a line of credit may be tax-deductible. However, in order to know if interest payments are deductible or not, you should always check with an accountant before trying to claim a deduction on your federal income tax return.

Lines of credit are excellent are good ways to make sure you have access to capital. However, lines of credit are generally only suitable for people that are very financially responsible, have no problem sticking to a good budget and who are not tempted to spend just because they have money in the form of a line the credit available.