Whenever you borrow money, you want to make sure you’re making the right decision. By tackling things in a hurry, you may be able to solve the initial problem more quickly, but it can lead to bigger problems later.
If you rush to get a line of credit, you may accept unaffordable fees. Or you might be caught off guard by hidden charges hidden by fine print you didn’t read.
If you want to avoid these costly mistakes, take the time to understand your options. This pros and cons list is a great place to start.
What is an online line of credit?
If you need to borrow money in an emergency, you generally have two options. Term loans or open-ended credit accounts are available.
A line of credit is an unlimited (or revolving) account. This means that you are given a credit limit that allows you to make as many withdrawals as you like up to this limit.
If you withdraw until the limit is reached, you will not be able to borrow any more. However, once you pay off the amount you owe, your limit will reset. You can do this any number of times, hence the term “revolving”.
Compare this to a term loan where you pay a fixed amount upfront. Once you have paid off what you owe, you can use this loan again. The only way to access more money is to apply for another term loan.
If you see the word “online” in front of this rotating account, it means that most (if not all) of the process is deployed online.
Online lenders like Fora host virtual applications on their websites 24/7, allowing borrowers to apply at any time.if approved Fora line of creditwithdrawals and refunds from your account can also be done online.
Advantages of online lines of credit
Here are three basic reasons why people take out online lines of credit.
1. Useful in unpredictable emergencies
A line of credit may be a more convenient way to borrow, especially if you don’t know how much an emergency will cost. This is because you can borrow as many times as you like, up to the limit.
Let’s explore this with an example.
Suppose you are eligible for a $2,000 line of credit when your car breaks down. You can withdraw $500 from this limit to make your first repairs, but you are free to spend the remaining $1,500 as well.
If your car needs another part or another repair, you can withdraw up to an additional $1,500 in any amount. Best of all, you should pay interest and fees only on the amount you use, not on the limit.
2. Can be a reliable safety net over time
This account is not closed like a term loan, so it stays open even after you pay off what you owe.
Each time you pay your balance down to zero, your credit facility is replenished. At this point, no interest accrues because no interest accrues. outstanding balance, but neither closes. Your account will be put into standby mode and available for the next emergency.
3. There is a minimum payment amount
Ideally, pay off what you use by the due date. This limits the interest accruing on your balance and frees up all of your limits for the next emergency.
In practice, you may not be able to pay the entire balance at once. You may encounter another emergency or need to withdraw more funds, making it impossible to cover everything.
A minimum payment is an option in these difficult circumstances. This is the minimum amount you must pay to avoid late fines and other late payment penalties. It may be easier to pay this as part of your balance until you have more money to pay.
Cons of online lines of credit
Here are some simple reasons why some people avoid credit lines.
1. Expensive
The cost of the line of credit varies from lender to lender. Each lender conducts a credit check as part of the underwriting process. They do this to see if you can be credited or if they are likely to repay what they have lent you.
if you have bad credit, high debt-to-income ratios, or other historical financial red flags, some lenders may refuse financing outright. Other lenders may be willing to work with you, but may apply higher interest rates.
2. Paying the minimum amount can keep you in debt
The last pro on the list can turn into a cons if you rely too much on the bare minimum.
But more importantly, minimum payment It means carrying most of the outstanding bill amount over to the next month’s statement. There, you will accrue more interest, so the longer you keep the balance, the more debt you will have.
This is true even if you don’t draw any more against the limit. As long as you have a balance, you will accrue interest that increases what you owe.
3. May be a constant temptation
Ideally, the line of credit should only be used in unforeseen circumstances and expenses cannot be delayed or paid off in any other way.
However, once you have a line of credit, you can use it however you like as long as there is space left. This includes unnecessary shopping, even if it is not recommended.
Drowning in lines of credit when you don’t need them can lead you take on more debtSince you couldn’t say no to the sale, it can be difficult to pay off without adding to the line of credit you used in an emergency.
It’s time to weigh the pros and cons
Now that you know the pros and cons of credit lines, it’s time to decide if one is better than the other. If, after this thought experiment, you still think taking out a line of credit is a good idea, check out the lenders available today.
