How a Personal Line of Credit Can Help Cover Unexpected Expenses
As you kick off the new year, you might have a goal to be more strategic with your finances in 2024. If you’re looking for more flexibility in managing your cash flow and want to know how to be covered when it comes to unexpected expenses, consider opening up a personal line of credit (LOC).
Below, we’ll discuss a personal line of credit, how it can benefit you, and some best practices for managing your finances with a LOC.
What Is a Personal Line of Credit (LOC)?
A personal line of credit is a revolving credit account. It works similarly to a credit card, as you can draw on your line of credit to access cash as needed, and it will have a predetermined limit that you can borrow up to.
A LOC is not a personal loan, so you don’t receive the money as a lump sum payment once approved. You can withdraw the funds as needed, and you’ll only pay interest on the amount you use, not the total approved amount. You have the flexibility to determine the amount of principal that you will pay each month.
It’s important to note that a personal line of credit is not the same as a home equity line of credit (HELOC), so it’s not based on the amount of equity you’ve built in your home. Approval for a personal line of credit is based on factors like your credit history and debt-to-income ratio, which will vary between financial institutions.
Can a LOC Help with Unexpected Expenses?
A line of credit can provide you with many advantages, including helping you when you face unexpected expenses or need to access more cash than what you have in your account at a given moment.
While it doesn’t necessarily replace the need for an emergency fund, if you have a LOC open, you can use it to meet your short-term cash needs. Overall, opening a line of credit can give you the peace of mind that you have a cushion available should you need it.
Line of Credit Best Practices
When you’ve opened a line of credit, there are some best practices that you should follow to set yourself up for financial success.
Understand the Terms and Conditions
Educate yourself on the terms of the line of credit before you start using it so you can make informed financial decisions. Ask your bank for further information and clarification if needed.
Only Use What You Need
Though you may be approved a certain amount with your line of credit, you don’t have to use it all. It’s often recommended that you only use it when you need to. You will have to pay interest on any amount you borrow, so keep this in mind when drawing down your LOC.
Especially if your primary purpose for opening a LOC is to avoid unexpected expenses, you may want to set a rule that you’ll only use it for essentials and emergencies, not for discretionary spending.
Repay Borrowed Amounts Quickly
When you use the line of credit, aim to repay the borrowed amount as soon as possible. Making quick repayments will help minimize the interest you’ll pay and positively contribute to your credit history. It will also keep those funds available until the next time you need them.
Open a Line of Credit with Waldo State Bank
Waldo State Bank (WSB) has been a leading community bank in our area since 1913. We are committed to providing financial solutions uniquely tailored to our customer’s needs and helping them reach their goals.
If you want more information and to learn how to apply, click here to get started.