Different Types of Lines of Credit
Since so much of Velocity Banking centers around the Line of Credit and Cash Flow, I thought we could talk about the 3 different types of lines of credit there are. As a refresher, a line of credit is an arrangement between a financial institution—usually a bank—and a customer that establishes the maximum loan amount the customer can borrow. Read more about lines of credit here or click on the video below to be linked to my YouTube Playlist all about lines of credit.
Types of Credit Lines
There are 3 types of credit lines – home equity, personal, and business. Business lines of credit work similarly to credit cards. The LOC comes with a credit limit, and borrowers make payments every month with interest based off of the amount they borrowed during that period. Your financial institution will most likely have more strict requirements for lines of credit than for business loans. If you think taking out a business line of credit is right for you to be sure to bring along your business registration papers, recent financial statements, and tax returns when you meet with a banker. Additionally, you may want to include contact details, other bank accounts, as well as a copy of the articles of incorporation. It's also helpful to have, good payment and credit history, and positive income.
Personal Lines of Credit come with some other quirks, like varied credit limits, depending on the financial institution. A borrower with good enough credit may be approved for a LOC with a limit of up to $50,000. Personal lines of have specific (and sometimes shorter) draw periods. Then when the repayment period begins, the borrower has to pay off the interest and principal amount.
A home equity line of credit, HELOC, is a line of credit that uses your home as collateral and gives you a revolving credit line to use for significant expenses or to consolidate higher-interest rate debt on other loans such as credit cards (like we do with Velocity Banking). Like with the personal line of credit you have a draw period where you can borrow against the limit more than once if you need to, and you can borrow as little or as much as you need throughout your draw period or until you hit the limit. At the end of the draw period, the repayment period begins. Talk to your bank or financial advisor about what it would take for you to qualify for a HELOC.
If you want to learn more about lines of credit check out this playlist from my YouTube Channel.