A line of credit (LOC) is a credit facility offered by financial institutions. In this arrangement, you have an account with a determined credit limit. You can borrow money, repay, and continue borrowing as long as it is within this limit. It’s an excellent option for those who need continued access to funds to pursue different goals, whether for business, home improvement projects, or other purposes.
Before opening a LOC, you’ll first need to know about the various types. That way, you can choose the one that best fits your needs and circumstances. Here’s what you need to know about the different kinds of LOC:
Personal Line of Credit
This type of LOC gives you access to unsecured funds that you can borrow and repay multiple times. However, to open a personal line of credit, you’ll need to demonstrate a credit history of no defaults, a credit score of 670 or higher, and proof of steady income. Showing that you have savings and stocks that could be used as collateral may also help you get approved, though collateral is not mandatory for a personal line of credit.
A personal LOC is often used for emergencies, travel, entertainment, weddings, other important events and to help supplement those who do not have a regular income.
Home Equity Line of Credit (HELOC)
A HELOC is a secured LOC that uses the home’s market value subtracted by the amount owed, which then serves as the foundation for establishing the line of credit’s size. Usually, the credit limit is 75 or 80 percent of the home’s market value, not accounting for the balance owed on the mortgage.
HELOCs are available with a draw period, typically ten years. During this period, the borrower can access these funds, repay, and borrow until the time has elapsed. The balance is due once the draw period has finished, but the borrower can extend the loan to repay the balance over a set time. HELOCs usually have closing costs, which is another factor to consider.
Securities-Backed Line of Credit (SBLOC)
This LOC is a special secured-demand kind, where the borrower’s securities serve as the collateral. An investor can borrow an