In today's video we are going to take a deep dive into understanding lines of credit at some point
you have either heard your financial institution or your mortgage broker mention words like
home equity line of credit secured or unsecured line of created personal line of credit student
line of credit etc while all that may be confusing to most people in this video we are going to break
it down in a simple and easy way to understand for this topic we are going to cover these key points
number one what is the line of credit number two choosing the right line of credit for you
number three pros and cons of a line of credit and finally number four what you need to know before
you borrow remember to subscribe to my youtube channel and hit the notification button in
order to be notified when i make further videos let's quickly dive in number one what is a line
of created a line of credit is a type of loan that lets you borrow money up to a preset limit you can
pay back the money at any time but you will have to pay interest on that money on a monthly basis
once you make any withdrawal you only pay interest monthly on the amount you withdraw until you pay
the balance back in full usually the interest rate on the line of credit is variable meaning
it may go up or down over time your credit score may also affect the interest you will pay
on a line of credit as it tells lenders how risky it is to lend you money meaning
the higher your credit score the lower the interest rate on your line of credit
for some lines of credit you may have to pay a registration or an administration fee it is
vital to ask your financial institution about any fees associated with a line of credit you borrow
each month you will get a statement showing the amount you owe on your line of credit and
you must make a minimum payment every month this payment is equal to the monthly interest usually
but paying only the interest means that you would never pay off the debt you owe number two
choosing the right line of credit for you you can either apply for a secured or unsecured line of
credit with a secured line of credit you can use an asset as collateral for that line of credit
but if you don't pay back what you owe the lender can take possession of that asset the advantage
of a secured line of credit is that you can get a lower interest rate
a home equity line of credit is a type of secured credit where your house acts as a collateral
and it usually has a higher credit limit and lower interest rate than other loans and lines of credit
but with an unsecured line of credit the loan isn't secured by any of your assets
examples are personal lines of credit and student lines of credit a personal line of
credit may be used for unexpected expenses or consolidating higher interest rate loans
while a student line of credit is specifically for paying for post-secondary education
in order for a lender to determine your credit limit and interest rate after you
apply for a line of credit they will ask for a lot of personal information
this is to confirm your identity verify your finances to ensure you can repay your debt
they will consider your income your current level of debt with other financial institutions
your credit report which is your record of paying your bills on time or paying back money you borrow
most financial institutions usually require a minimum household income of thirty five thousand
to fifty thousand dollars to approve a line of credit number three pros are cons of a line
of credit before you ever take on a line of credit loan it is vital you compare the pros and cons
the main pros of the line of credit usually are a you will pay a lower interest rate
compared to a credit card or a personal loan b depending on the type of line of credit and
financial institution you may not be charged set up fees or annual administration fees
and if you bank with the same financial institution where you got your line of credit
you may be able to have any overdraft on your checking account transferred to your line of
credit while the cons of a line of credit are a with easy access to money from a line of credit
you might you may get into serious financial trouble if you don't control your spending
b if interest rates increase you may have difficulty paying back your line of credit
number four what you need to know before you borrow when you get a loan or line of credit
with a federally regulated financial institution you have the right to receive certain information
your lender may offer optional insurance for your line of credit also known as balance protection
insurance balance insurance or credit protection insurance it is vital to know that you don't need
to sign up for insurance to be approved on your line of credit although this type of insurance
may help cover a certain amount of your loan payments if you can't make them due to illness
accident debt or if you lose your job but ensure you read the certificate of insurance to determine
what's covered what is excluded and the maximum amount of your line of credit that
will be covered before adding line of credit insurance the price of the insurance may vary
based on your age and the amount of your line of credit the price may also vary between
lenders note that federally regulated lenders such as banks can't add optional insurance on
your line of credit without your permission thank you guys for watching and bye for now