When things go wrong, they tend to be expensive. Fixing a broken taillight, repairing a touchy furnace, and paying for an unexpected trip to the doctor’s office add pressure to your budget. These expenses may be hard to handle without the help of a personal line of credit (or LoC for short).
While an LoC is a great way to face unexpected emergency expenses when money is tight, it’s still borrowed money. You need to make sure you’re choosing the right option for your finances to make sure it’s an affordable way to cover your bills.
So before you apply for an LoC, find out the answers to the important questions below.
1. Do You Have to Put up Collateral?
Collateral, or an asset you pledge against your loan, changes your loan agreement.
If you have to put up collateral, you’re borrowing what’s called a secured LoC. You may use your house, car, or some other valuable belonging as a way to guarantee your loan. If you can’t pay it back, your financial institution may take these belongings as payment.
There are some financial institutions like CreditFresh that don’t require collateral on a line of credit. This makes it an unsecured line of credit.
2. What is the Interest Rate?
When it comes to borrowing money, your interest rate plays an important role in how much you end up paying back because you rarely ever just pay back the principal (the amount you borrowed) on its own.
Generally, interest is calculated as a percentage of your principal. That percentage represents the rate, and it may be as low as one percent or higher than 600.
An interest rate of 600 will cost you more than a rate of one percent, which is why it’s so important you know this number. Check your terms and conditions to find out what your rate is before you apply.
3. How is Your Minimum Payment Calculated?
One of the most attractive things about using a personal line of credit vs personal loan is the option to make what’s called a minimum payment.
A minimum payment is the least amount of money you can pay and avoid late fees. By paying this, you may avoid adding a delinquent payment in your history, too.
As a general rule of thumb, your minimum payment is either a percentage of your balance or a small flat fee — whichever is the larger option. Nevertheless, every line of credit is different. You must look to your rates and terms to understand how your financial institution calculates this number.
Another good rule of thumb you should remember is to rely on your minimum payment sparingly. It’s there in an emergency when you can’t afford to pay your full balance in its entirety.
Paying the minimum means you’re carrying over a balance, which is subject to interest and may factor into your utilization ratio. To rely on it every time, even when you have the cash, may impact your history and increase your debt.
Once you do the research, you’re an informed borrower ready to apply for the product that works for you. But don’t take your work for granted the next time you need to take out another LoC. Every LoC is different, so you’ll need to double check if what you learned still applies.