Many people do not have a good understanding of what a line of credit is, but it is a very important thing to understand. When you are doing any type of financial planning, contemplating a loan or have any major financial decision to make, an understanding of a line of credit is very helpful.
Let's discuss when it is wise to use a line of credit versus when it is better to get a loan.
A loan is when you receive a lump sum of money under set terms and conditions for repayment, with a set interest rate and monthly payment. For example, your mortgage is a loan. The terms of the loan are fully disclosed to you when you receive the money so you know exactly when you are expected to have the loan paid in full.
Another example is a car. You are able to choose how long you want the loan to go along with the payment you want by talking with your local banker or the car dealership. An important point to remember is that the shorter the loan duration will equal less interest paid over the life of the loan.
Of course, all of your monthly payment is not going toward paying down the principle of the loan. Much of that payment is applied to interest.
Starting with the first payment, only a small portion goes toward the principal and the lion's share goes toward interest. As you progress further into the loan, the amount going to principal increases.
A line of credit works differently in that it is an amount of money available to you to use when and as you see fit. You may set up a line of credit without having a specific purpose for the money at the time. Interest rates for lines of credit are figured based on prime, which is established by the Federal Reserve.
Knowing the difference between a line of credit and a loan is helpful in your financial planning. It will help you to make good decisions as to which is best to choose to handle your financial needs. - 15224
Let's discuss when it is wise to use a line of credit versus when it is better to get a loan.
A loan is when you receive a lump sum of money under set terms and conditions for repayment, with a set interest rate and monthly payment. For example, your mortgage is a loan. The terms of the loan are fully disclosed to you when you receive the money so you know exactly when you are expected to have the loan paid in full.
Another example is a car. You are able to choose how long you want the loan to go along with the payment you want by talking with your local banker or the car dealership. An important point to remember is that the shorter the loan duration will equal less interest paid over the life of the loan.
Of course, all of your monthly payment is not going toward paying down the principle of the loan. Much of that payment is applied to interest.
Starting with the first payment, only a small portion goes toward the principal and the lion's share goes toward interest. As you progress further into the loan, the amount going to principal increases.
A line of credit works differently in that it is an amount of money available to you to use when and as you see fit. You may set up a line of credit without having a specific purpose for the money at the time. Interest rates for lines of credit are figured based on prime, which is established by the Federal Reserve.
Knowing the difference between a line of credit and a loan is helpful in your financial planning. It will help you to make good decisions as to which is best to choose to handle your financial needs. - 15224
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