What Is The Purpose Of A Line Of Credit?

Short Answer: when you need a short term loan.

What Is A Line Of Credit?

Think of a line of credit like a really cheap credit card. You have a limit on it like a credit card. You can pay it back and draw from it at will, that is, it’s an “open” loan, and you can make minimum payments. That’s where the similarity ends. Lines of credit usually have a much lower rate than your credit card. You’ll get an even better rate if the line of credit is secured against your home. That’s called a home equity line of credit or HELOC.

When should I use a line of credit?

Generally, you should only be using your line for short term loans. A line of credit (especially and unsecured one) is usually more expensive than a mortgage. So if you plan on paying down the line over a relatively long period of time, you might as well “lock” it into a mortgage, make structured principle and interest payments, and get a much better rate. If you are accessing the line for a short period, then it’s better to pay the higher rate as opposed to “locking in”. A line if credit is very flexible, but you pay a slight premium for that!