Dissecting a Line of Credit

A line of credit is a type of personal loan that is sought after by people for many different purposes. People have used lines of credit to buy equipment for their business, pay for a vacation and put a down payment on a piece of property and many other things aside from those three. Before you go and take out a line of credit however there are a few factors that you need to understand about them.

Security: This is more towards the security of the loan itself rather than your own personal security. There are two specific kinds of loans in personal finance; secured loans and unsecured loans. A secured loan is one that requires you to put up some form of collateral. In the event that you are unable to pay off the loan your collateral is confiscated and liquidated by the bank in order to cover their losses. An unsecured loan does not require any kind of collateral and most of the time this results in a higher interest rate. Most lines of credit are unsecured although if you have really poor credit then the bank might still ask for collateral.

Interest Rates: This is really the major factor that sets different lines of credit apart from each other in quality. Being able to collect interest on a loan is the whole reason that banks give away loans in the first place; it is a method for them to gain money in the long run. Lines of credit are diverse from bank to bank and for that reason you will see a large range of interest rates as you begin to look through the different deals that are available to you. Naturally, lower interest rates are better but only if they are permanent interest rates. Be wary of teaser rates and make sure that whatever rate you agree upon is the rate that will apply over the whole course of the loan.

Fees: Fees are the lifeblood of a bank; they make the vast majority of their money from fees and when you look at the number of fees involved in any banking you do it is perhaps not that difficult to believe. Lines of credit, however, should not have any initial fees involved with them. There might be fees for late payments but there should be no fee for the initial processing of the loan. Be extremely wary of any financial institution that asks you to pay up front in order to receive a line of credit as this is usually a good indication that there are other fine print terms that they plan to trap you with.

Article correct at its author date: March 2007. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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