7 Of The Best Business Lines Of Credit – Loans and lines of credit (LOC) are two different ways that businesses and individuals can borrow from lenders.
Loans have what’s called a non-revolving credit line, which means borrowers only have access to the funds once, and then they make principal and interest payments until the debt is paid in full.
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On the other hand, lines of credit work differently. Borrowers receive a set credit limit—like a credit card—and make regular payments that cover principal and interest. Unlike a loan, a borrower has continuous and recurring access to a line of credit as long as the line of credit is active.
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Approval for loans and lines of credit (also referred to as lines of credit) depends on the borrower’s credit rating and financial history, as well as their relationship with the lender.
Loans come in specific dollar amounts based on the borrower’s needs and creditworthiness. Like other non-revolving credit products, loans are given all at once for one-time use, so credit advances cannot be used repeatedly like credit cards.
Loans are secured or unsecured. Secured loans are backed by some form of collateral—in most cases, these are the same assets as the loan being advanced. For example, a car loan is secured by the vehicle. If the borrower does not meet his or her financial obligations and fails to repay the loan, the lender can repossess the car, sell it, and apply the proceeds to the remaining loan balance. If there is an outstanding amount, the lender may be able to pursue the borrower for the remainder.
In contrast, unsecured loans are not backed by collateral of any kind. In most cases, approval for these loans depends solely on the borrower’s credit history. Because these loans are unsecured, there is no way for the lender to get the money back in the event of default, so these loans generally have lower amounts and have higher interest rates than secured loans. (The exact value will also depend on the type of loan the individual or business takes out.)
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Secured loans usually have lower interest rates due to their low level of risk. Because most borrowers don’t want to give up collateral—for example, their home or car—they tend to keep their payments. If they fail to repay the loan, the collateral still has most of its value to the lender.
A line of credit is a predetermined loan limit that can be used at any time, repaid, and borrowed again.
Loans are based on the borrower’s specific needs, such as purchasing a car or home.
A mortgage is a special loan used to purchase a home or other type of property and is secured by the parcel of real estate in question. To qualify, borrowers must meet the lender’s minimum credit limits and income. Once approved, the lender pays for the property, leaving the borrower to make regular principal and interest payments until the loan is paid off. Because mortgages are secured by property, interest rates tend to be lower than other loans.
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Like mortgages, auto loans are secured. The guarantee in this case is the vehicle in question. The lender advances the amount of the purchase price to the seller—less any down payment paid by the borrower. Borrowers must comply with the loan terms, including making regular payments until the loan is paid off. If the borrower defaults, the lender can repossess the vehicle and pursue the debtor for the remaining balance. Often, car dealers or car manufacturers offer to be lenders.
Consumers can consolidate all their debts into one by approaching a lender for a debt consolidation loan. If and when approved, the bank pays off the entire debt. Instead of making multiple payments, the borrower is only responsible for one regular payment, made to the new lender. Most debt consolidation loans are unsecured.
Home improvement loans may or may not be secured by collateral. If homeowners need to make repairs, they can contact a bank or other financial institution to obtain a loan to make renovations that will likely increase the value of their home.
This is a common form of debt used to fund qualified educational expenses. Student loans—also called education loans—are offered through federal or private loan programs. They often rely on the income and credit rating of a student’s parents rather than the student themselves—but it is the student who is responsible for the repayment. Payments are typically deferred while students are in school and for the first six months after graduation.
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Business loans, also called commercial loans, are special credit products provided to small, medium and large businesses. They can be used to purchase more inventory, hire staff, continue daily operations, or simply as capital infusion.
In addition to interest, borrowers generally pay other fees for loans, such as application fees and loan origination fees.
Lines of credit work differently than loans. When a borrower is approved for a credit facility, the bank or financial institution will provide them with a certain credit limit that can be used repeatedly, in whole or in part by the borrower. This makes it a revolving credit line, which makes it a much more flexible borrowing tool. Some lines of credit may also include an accordion feature that allows access to increased funding rates. Unlike a loan, a line of credit can be used for any purpose—from everyday purchases to special expenses, such as travel, small renovations, or paying off high-interest debt.
A person’s credit limit operates like a credit card, and in some cases, like a checking account. Similar to a credit card, individuals can access the funds whenever they need them as long as the account is current and credit is available. For example, if you have a credit line with a limit of $10,000, you can use some or all of it for whatever you need. If you have a balance of $5,000, you can still use the remaining $5,000 at any time. If you pay off $5,000, then you can access the full $10,000 again.
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Lines of credit tend to have higher interest rates, lower dollar amounts, and smaller minimum payment amounts than loans. Payments are required monthly and consist of principal and interest.
Additionally, lines of credit typically have a more immediate and significant impact on a consumer’s credit report and credit score. Interest accumulation begins only after you make a purchase or withdraw cash within your credit limit.
Some lines of credit also function as checking accounts. This means you can make purchases and payments using a linked debit card or write checks to the account.
This is an unsecured line of credit. Just like unsecured loans, there is no collateral that guarantees this credit vehicle. Therefore, this requires the borrower to have a higher credit score. Personal lines of credit typically have lower credit limits and higher interest rates. Most banks issue this credit to borrowers without a time limit.
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This line of credit is used by businesses on an as-needed basis. Banks or financial institutions consider the market value and profitability of the company as well as the risks. Business lines of credit can be secured or unsecured based on how much credit is requested, and interest rates tend to vary.
A home equity line of credit (HELOC) is a secured credit facility that is primarily backed by the market value of your home. A HELOC also takes into account how much the borrower owes on their mortgage. The credit limit for most HELOCs can be up to 80% of the home’s market value minus the amount still owed on your mortgage.
Most HELOCs have a specified withdrawal period—usually up to 10 years. During this time, the borrower can use, pay, and reuse the funds over and over again. Because it is secured, you can expect to pay lower interest for a HELOC compared to a personal line of credit.
Loans can be secured or unsecured. Unsecured loans are not backed by any collateral, so they generally have lower amounts and higher interest rates. Secured loans are backed by collateral—for example, the home or car used to purchase the loan.
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Although lines of credit can be used repeatedly like credit cards, they tend to have higher interest rates and lower dollar amounts,
Loans are non-revolving credit products so they cannot be used like credit cards. Because it is a lump sum for one-time use, the credit advance cannot be used repeatedly.
Both loans and lines of credit are important tools for stimulating economic growth. For ongoing credit needs, revolving credit sources such as credit cards or lines of credit are most useful, but may incur higher fees. Loans may have higher upfront costs but they can cost less in the long run. Evaluate your credit needs before applying to find the best fit.
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