What to Look Out for When Using Line of Credit Loans
Are you facing an unexpected expense? A line of credit could help with that. It provides you with funds you can use to make a large purchase or pay for an essential repair. But like any other business loan, this helpful revolving product comes with strings attached. You have to repay what you use by the due date or risk tanking your credit score and accruing interest.
Whether you’re currently using a line of credit, are thinking about applying for a line of credit online, or simply wondering how to better manage this loan in the future, keep scrolling. Here’s some advice on how to use it.
Always Pay as Much as You Can
Every month, your billing statement comes with two possible payment options:
- Your Balance Owing: This includes the purchases you’ve made on the account, plus any interest and finance charges.
- Minimum Payment: This is a flat fee or percentage of your balance.
Out of the two, the minimum payment will always be less, so you may be tempted to pay this every month. But making this minimum doesn’t attack your debt in a meaningful way, so you’ll carry over the majority of your balance to the next billing period.
At this point, this outstanding balance on the business loan will accrue interest and finance charges. If you pay nothing but the minimum, you’ll increase your debt even if you don’t make another purchase with your LoC.
To limit interest and reduce your debt, pay as much of your balance as possible. If this is a challenge, look to your budget to see how you can rearrange your spending to put more cash toward your bills.
Cost
Just how much your interest rate and finance charges will cost you depends on your lender and credit score. Comparison shop to see which lender gives you the best deal for your score, or, if possible, wait to apply for an LoC until you’ve managed to boost your score.
The Temptation to Borrow More
Line of credit loans are different from your typical term loan. Instead of receiving a pile of money upfront, you have a limit. This distinction affects how easily you can borrow in the future.
With a typical installment business loan, you have a specific time to repay what you owe. The account closes after you pay back the final cent. This brings a sense of closure to your finances. If you need more cash, you’ll have to apply for another installment loan.
With an LoC, you still have to repay what you owe by a specific date. However, your payment resets your account and frees up your limit so that you can borrow against it on a revolving basis.
This access to credit is one of its biggest perks, but it’s also one of its biggest drawbacks. It’s tempting to tap into your available credit whenever you want to make a purchase, forgetting that these products are designed for unexpected emergency expenses.
Don’t Use This Account as a Financial Crutch
Remember, your line of credit is there as a safety net in case you can’t cover a repair or bill on your own, so keep your LoC stored away until you need help. In the meantime, sit down with your budget to organize your spending better. This little task will make it easier to pay off your LoC once you get around to using it for a business loan.