What is a Personal Line of Credit?
A personal credit line is a personal finance mode where you can secure a pre-approved credit amount from a bank or a financial institution and make cash withdrawals within the set limit. It is a revolving credit mechanism, and the advantage is that you pay interest only on the amount used, not on the entire approved amount. This form of credit is usually cheaper than credit cards in terms of rate of interest. Every month, the balance gets replenished once you repay the amount. A line of credit can be secured against collateral, or it may be unsecured, too, depending on your credit score.
When can you opt for a personal line of credit?
A personal line of credit is perfect in these situations –
For Freelancers and Project Workers:
If you are a freelancer or work on a contractual basis, there tends to be a lack of income consistency. There may also be cases where your project is delivered, but the payment shall come in from the client at a future date. In these situations, a line of credit is useful to ensure that your cash flows do not negatively impact your ability to conduct business. It also makes sure that your private expenses and bill payments do not get impeded.
For an Unpredictable Expense or Purchase:
Sometimes, you may have significant expenses that were not accounted for in your monthly budgeting. For example, home repairs or improvements, vehicle breakdown and repairs, medical emergency expenses, etc. In these situations, you may not know the exact amount of money that you will need. Here, you can choose to opt for a personal line of credit, which can bail you out from these unaccounted expenses without disturbing your cash flows.
For Self-employed people:
If you are self-employed, just starting with a business venture, or if you have a single proprietorship business, there are chances that your income may be irregular. If your business is seasonal, it is even possible that your cash flows could be tight during the off-season. A personal line of credit can prove to be a worthwhile measure to cushion your finances in such scenarios.
Quick Tips to Qualify for a Personal Line of Credit
Have all Your information ready: Ensure that you have all the information, including your income and other documentation as necessary for credit approval, ready.
Have a Good Credit Score: Your credit score shall determine whether your request is approved and what interest rate will the lender offers you. Some lenders may use a soft inquiry that will not affect your score, while others may request a hard inquiry, which will take down a few points from your credit score. Ensure that you have a good credit score, which does not significantly affect a hard inquiry.
Prove That you can Pay Back The Money:If your debt-to-income ratio is very high, your request may get disapproved. So make sure that you have enough income to repay every month.