There are different financial options to aid private individuals in need of funding. One of these options is the private line of credit, which is aimed at non-business or individual use. It is an open-ended type of credit that is suitable for emergencies and other unforeseen financial expenditures.
We will do a breakdown of private lines of credit to help you understand what it’s about, how it works, and how you can qualify for one. We’ll also introduce you to some related concepts, and how they affect the money line of credit.
What is a Private Line of Credit?
A line of credit is a type of loan that permits the money lender to make simultaneous withdrawals with a maximum limit. A line of credit gives you access to a bulk amount of credit, which is then withdrawn in parts, and interest is only paid on your withdrawal instead of the whole credit.
A money line of credit is classified into private/personal or business lines of credit depending on the nature of the recipient. A business line of credit is designed for a business investor and is used for business-oriented expenses. A business line of credit usually has a larger maximum credit limit and stringent requirements.
On the other hand, a private line of credit is suitable for private individuals or a business owner, and it is aimed at personal expenses. Like a business line of credit, this line of credit refers to a loan that gives you access to a bulk sum of credit, which can be withdrawn in parts. The interest on the loan is also paid on only the withdrawal. Also, it is a type of open-end credit, and it is a great option for recurring expenses or long-term personal expenditures.
What are Open-end and Close-end Credits?
Open-end credits refer to revolving loans, such as business and personal lines of credit, which allow you to make repeated withdrawals from a set limit. Open-end credits require payment on only what you’ve withdrawn instead of the total credit available. However, there is a time limit on this contract, after which, you must pay the principal and interest.
Examples of open-end credits are business and personal lines of credit, credit cards, and home equity lines of credit.
Closed-end credits refer to the regular loan format where a certain sum is credited to the borrower at once. This type of loan is repaid over time based on the terms of the contract and with the agreed interest.
The difference between the open and closed-end credits is that you pay only what you borrowed from the available credit for the open-end while you have to pay the entire credit for the closed-end contracts.
Secured and Unsecured Private Line of Credit
Still discussing what a private line of credit is, it can be secured or unsecured. This is based on the collateral requirements of the lender.
Secured Private Line of Credit
A secured private line of credit is backed with an asset or value that serves as collateral. It requires the borrower to provide a valuable asset as collateral if the terms of the agreement are voided. The loan can be secured with properties, vehicles, and other assets of almost equal value to the loan.
This type of loan is more secure for the lender because there is something to fall back on if the borrower can’t pay at the end of the agreed time. The interest rate on a secured line of credit is significantly low due to the presence of collateral, and there is a higher credit limit.
You can go for a secured private line of credit if you’re confident in keeping to the terms of the agreement, and need a higher credit cap. It is also easier to meet the requirements of a secured line of credit. A hard money line of credit is a type of secured line of credit.
Unsecured Private Line of Credit
Unlike the secured line of credit, this type doesn’t require collateral. An unsecured private line of credit doesn’t require you to drop a valuable asset to stand as a guarantee to the lender. However, this type of loan is harder to obtain, and there are a lot of requirements.
An unsecured line of credit has a high interest rate and there is a major limit on the maximum amount of credit accessible. The borrower is exposed to larger risk since the contract is unsecured, and they need to reduce potential losses as much as possible. A credit card is a good example of an unsecured line of credit which explains the high interest rate.
Secured and unsecured lines of credit apply to both business and private lines of credit contracts. The major differences between them are the collateral requirements, interest rates, and the size of the loan.
Both types of credit have their advantages and disadvantages. We advise going for a secured line of credit if you need a large sum because the interest rate is lower. On the other hand, an unsecured line of credit is suitable for day-to-day transactions.
How a Private Line of Credit Works
We will discuss how it works in terms of the dynamics and fees.
Dynamics
A private line of credit gives you access to a bulk sum of credit which can be withdrawn in parts. You are only required to pay the interest on each withdrawal you make. The loan is valid over a time frame, and you’re allowed to make continuous withdrawals within the limit during that time.
Each withdrawal leaves you with a lower balance which is reverted once the outstanding amount is paid.
Private lines of credit have a draw period; the duration during which you’re allowed to withdraw or borrow from your line of credit. This withdrawal is usually with a chequebook or special card. The monthly payments during the draw period are for the interest on each withdrawal.
The repayment period refers to the end of the draw period when you have to pay the balance. You can’t make withdrawals during the repayment period. The draw period and repayment period vary with the lender.
Fees
Different fees can be attached to a personal line of credit contract, and these fees vary with the lender or financial institution.
- Origination Fee: The origination fee is for the application process and underwriting.
- Annual or Monthly Fee: This is a maintenance fee for the duration of your line of credit.
- Over Limit Fee: This fee applies when your credit surpasses the limit.
- Late Payment Fee: This fee is charged when there is a delay in payment.
Importance of a Private Line of Credit
Flexibility
It allows you to borrow what you need at a time, and you pay interest on only that amount. This gives room for flexibility in spending and allows you to budget for unforeseen expenses.
A private line of credit gives you flexibility in that you can easily diversify or spend money on other endeavors. The nature of the loan provides you with a set amount of funds which you can withdraw from when you need. This ensures that there is capital to try different things.
Line of credit is a great choice for a private investor and business owner alike.
Good Rates
It has better rates, and you’re only required to pay the interest during the draw period.
Future Expenditure
A line of credit is a great choice for future or unforeseen expenditures. The line of credit allows you to make a continuous withdrawal within the time that the loan is valid. You can fund future endeavors using this loan, as long as you don’t exceed the credit limit.
You can use a personal line of credit for home improvement, medical bills, and more.
Steps to Getting a Private Line of Credit
Here is how to get a private line of credit.
Credit Score Verification
The most important factor when applying for a PLOC is your credit score. Your credit score tells the lender how reliable you are. It is one of the major determinants if you’ll be eligible for a loan. Ensure your credit score limit meets the required limit for the desired loan.
Make A Budget
Have an idea of how much you need because it will determine the upper limit of your line of credit. We advise going for the highest limit if you’re preparing for large future expenditures.
Lenders
Different financial institutions are offering private lines of credit at different rates and conditions. Ensure you research well, and pick one that favors you.
Applying
There are forms, and documents that are needed when applying. Ensure you have all the requirements and fill out every form necessary.
Get a Hard Money Line of Credit With Capital Max
If you’re looking for the perfect line of credit for your business or personal use, reach out to us at Capital Max. We provide expert guidance on how to your desired loans. We also offer affordable loan options to help boost your financial endeavors. Thanks to our competitive rates and flexible terms, you can get to navigate through your financial needs with our offers.