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Loans and Lines of Credit: Which One Is Right for My Needs?
You can find a wide range of ways to borrow money; the option you choose primarily depends upon your specific requirements. You may be considering either a loan or a line of credit, but these two financing options are not identical.
If you need an emergency loan or you want to finance a particular item like a new car, home repairs, or medical expenses, pairing your needs with the appropriate funding can mean the difference between smooth sailing and a shipwreck.
How Do Loans and Lines of Credit Differ?
A line of credit is not exactly a loan; actually, a line of credit is used similarly to the way in which you use your credit card. When you receive a loan, you use it at once and then repay the entire amount, but if you receive a line of credit, you can borrow against the amount many times, provided that you eventually repay the amount of money that you owe.
Here are some basics to keep in mind about loans and lines of credit:
- Loans are lump sum payments.
You receive the entire sum of money, you use this amount for your own personal needs and you return the entire amount via payments. As soon as you pay the money, your agreement with the lender ceases to exist.
- Lines of credit work in a different way.
They permit you to use the amount of the loan for your needs as long as you keep paying back the outstanding balance. You can think of them in much the same way you would a credit card..
- For instance, you may receive an offer for a line of credit you can use to remodel your house, begin a new business venture, pay outstanding hospital bills, or even all three of these examples.
- There may be various rates of interest.
Different lenders have varying interest rates for loans and lines of credit, so you need to shop for the best rates you can find. One lender may provide better rates for a line of credit while another lender may provide the best deal for a loan.
- You need to do your research before you make a decision to choose a loan or a line of credit for your special needs. If you research a variety of options, you will then have a greater chance of success in obtaining the best interest rate and type of loan that satisfies your purposes.
- Certain purposes are involved with specific lending options, so you need to make sure you pick the right format.
You typically have more flexibility when your line of credit is approved by a lender. Most loans are provided for set specific purposes such as financing a vehicle or consolidating debt into one monthly payment. Why do you want this funding?
- Try to locate a lending option that fits your intended use. If you are seeking funding for a variety of things, a line of credit may be right for you. If you are borrowing for a one-time expenditure such as purchasing a house, buying a car, or paying off a set of medical bills, a traditional loan is generally the most appropriate.
- Loans might come with a penalty for early repayment.
A number of loans come with penalties when paid off early, as the lender loses profit they would have gained through interest. Lines of credit generally won’t penalize you for making larger payments than the monthly minimum amount or paying them off early, as they don’t have a term length.
In the end, determining what kind lending is appropriate for you is completely up to you. One loan officer may permit you to choose between a variety of options, and another lender may only provide you with one option that is best for your needs.
In order to make sure that you are applying for the right type of loan, ask the lender any important questions that are in your mind. If you are uncertain which specific loan or line of credit is best suited to your needs, look for more information until you arrive at the funding option that’s good for you.