How Line of Credit is Different From Payday Loans ?
If you are stuck with some emergency expense for car maintenance or other home project, a line of credit could be the possible solution to tackle the situation. A line of credit is a preset amount of money that a bank or credit union has agreed to lend you. You can draw from the line of credit when you need it, up to the maximum amount. You’ll pay interest on the amount you borrow. So, basically it grants the access to required cash on demand and is offered by lenders such as banks or credit unions. The interest is implied only on the amount borrowed and once the borrowed amount is paid back it again become available to use again.
What Are The Types of Line of Credit ?
There are two types of line of credit as follows:
1. Secured Line of Credit
A secured line of credit allows the consumer to borrow against the collateral. It typically comes with a variable interest rate, which means payments may increase over time. For example if you use home as collateral, the bank will limit the amount you can borrow to up to 85% of home’s appraised value minus the balance remaining on first mortgage. Here, credit scores including your credit history and income play prominent role in deciding interest rate. If the borrower does not have own home to use as collateral, then line of credit can be issued against a savings account or certificate of deposit. The only disadvantage here is that if the borrower can’t make the payments on time then the collateral would be acquired by bank or the creditor.
2. Unsecured Line of Credit
If the borrowers default on an unsecured line of credit, they do not lose their home or savings but the lender here is taking on more risk, which could lead to higher interest rates as compared to secured line. Every unsecured line of credit has unique terms. The limits may range between a few thousand to a few hundred thousand dollars. Some lines of credit come with fees.
What is the Difference Between a Payday Loan and a Line of Credit?
Pros of Payday Loan:
- Simplest application form
- Lenient qualification criteria
- One-time fee per loan
- Quick cash delivery within 24 business hours
- No Hard credit check involved
- No paper work
Cons of Payday Loans:
- High Interest Rate and Loan Fee
- Loan rollover resulting into more debt
- Full lump sum payment on payday
Pros of Line of Credit Loan:
- One-time application
- Higher loan amounts available
Cons of Line of Credit Loan:
- Interest charged on daily basis
- Repayment amount can fluctuate
- Stricter qualifications, good credit rating is required
One way to compare these two financial services is to look at their annual percentage rates (APR). Payday loans incur have APRs around 400 percent however, APR for lines of credit fluctuate depending on borrower’s credit history. Despite the option to fulfill your needs, you must understand the process and terms & conditions applied for successful lending processing.
