Lines of credit are an interesting form of financing for both individuals and companies. We can enjoy the amount of money we need when we need it, paying interest only for the amount we use. If you want to know everything about the credit lines, take a look at the following selection of credit cards.
What are the credit lines?
A line of credit is a financial service that allows us to get the money when we need it. It is a contract that gives us the right to make use of a money limit but, in no case, we have the obligation to do so. This means that unlike a loan (which is a fixed amount) if we hire a line of credit we can obtain financing progressively when we need it. It is for this reason that although credit and loans are often used as synonyms, we must not confuse them.
This is when we must begin to distinguish between loan and credit, since they are not really identical financial products, although they are very similar. As we have said, a payday loan https://green-touch.org/ is a fixed amount of money from which we will pay interest during the repayment periods.
What are the credit lines for?
The objective of the credit lines is to obtain financing when the necessary capital is not available to cover an expense. Let’s see in what situations they can go well:
- Make a purchase: if for some reason we need to make a purchase that entails a significant outlay of capital and we do not have the necessary money to pay it, we can use a line of credit.
- Pay a receipt or invoice: if we have to face the payment of a receipt or an invoice, either as individuals or as companies, the lines of credit can be of great help.
- Solve an urgent unexpected: there are times when we suddenly have to face an unexpected expense that requires an urgent response. In those cases, if we do not have enough money, the lines of credit will allow us to get liquidity very quickly and solve the problem.
In what situations can a line of credit be useful?
Generally, we know much more about the characteristics of the loans than about the credit lines and we think that the former is more useful for all kinds of circumstances. But really, these financing tools can be very useful depending on our consumption habits.
The lines of credit were designed for those situations in which we know that we will spend a certain amount of money, but without knowing how much or exactly when. So it might be preferable to have a credit limit at our disposal for a period of time to be available when we need it because in this way we will only pay interest on what we use.
An example would be a vacation, in which we know that we will spend a quantity of money over several days. On the other hand, if we asked for a loan to cover the expenses, we would have to pay the cost of each euro received, even if we did not use everything at all. Anyway, personal loans, depending on the amount, can become cheaper, so it will be advisable that we compare the conditions of both to know what is best for each situation.
Differences between lines of credit and loans
A loan is a fixed amount of money that will have to be repaid within a certain period at a specific interest rate. For example, the bank “A” lends a certain amount of money to a client and he will have to repay it in monthly installments distributed over 5 years with an interest rate of 10%.
On the contrary, the credit lines offer the client the possibility of using a certain amount of money when needed, up to a certain limit (the credit limit) and paying interest only for the money used. Unlike loans, the bank does not give the customer all the money but makes it available to them and it is they who decide if they want to use it and in what amount. In addition, you only pay interest on the part used, regardless of how much money the bank has placed at your disposal.
Requesting a line of credit does not entail, in and of itself, any expense until the moment in which the client begins to use the money, while the loans generate interest from the moment in which they are granted.
A classic example to understand credit lines are credit cards. The owner has a money that can be used every month, for example, € 800. The client has the right, during that time, to use that money and will have to pay interest for the money that he uses, not for the total of the line of credit.
Who can access a line of credit?
The lines of credit are available to individuals and companies at the same time. In the case of individuals, we can use them, for example, to make purchases of amounts that at the time of payment we do not have. In this way, we pull the line of credit to make the payment with the amount we need and then return it with interest.
In the case of companies, this system can be used to get by on many occasions. Imagine that we are a businessman in the industrial sector and that, suddenly, we have to face a costly repair of a very important machine and we do not have the necessary money to do it; What we could do in such a situation is to use the credit line to solve our urgency and return the amount we have extracted once we have recovered economic liquidity with some payment from our customers.
The conditions and benefits, for both parties, are usually the same; The obligation of the borrower consists of paying the entity that grants the credit the interest of the amount used, as well as the interests of the latter within the established term. In the case of the financial institution, its obligation will be to provide the borrower with the amount of money requested in the indicated period.
Commissions that can be applied to lines of credit
As we already know, the commissions are amounts that they charge us for carrying out commercial transactions that correspond to the percentage on the amount of said management. Although the commissions may vary depending on the entity that we go to, we may find the following, which are the most recurrent:
- Commission for disposition of cash: this commission is applied, basically, for withdrawing money at ATMs. The amount charged to us will depend on the network to which the ATM in which the operation takes place, although, generally, these commissions are higher in ATMs that do not belong to the network of our entity.
- Commission for early repayment: to apply this commission means that we will be paying the entity the management costs of an early refund that can be total or partial. The percentage relative to these expenses usually ranges from 0.5 to 1%.
- Commission for opening and renewal: as its own name indicates, it is the amount that we will have to pay to cover the opening costs of the credit line and the renewal costs in the event that the fixed period expires.
If we are thinking about opening a line of credit as a method of financing, it is important that we read the terms and conditions of the entity in question to make sure that we agree with the percentages related to these commissions.
Advantages of the lines of credit
Once we know what the credit lines are, what they can be used for and what expenses usually associated with them, it would not hurt to discover the advantages that we have at our disposal if we decide to use them as a financing channel:
- Money instantly: from the moment in which the bank authorizes the granting of the credit line, the client can dispose of the money he wants at the moment he needs it.
- Fair amounts: lines of credit allow us to get the right amount of money we need.
- You pay only for what you use: one of the main advantages of credit lines is that you only have to pay when you use the money. Thus, we can request a line of credit to heal ourselves in health, in case one day we need it, but not pay until the moment in which we take money out of it.
The best we can do to ensure the advantages of the credit card we choose is to go entity by entity inquiring into the benefits granted in this payment method; The fact that it offers us some benefits or others can make our decision much more accurate. To speed up our search, using a credit card ranking could be very useful.