Personal Line of Credit
What is a personal line of credit?
A Personal Line of Credit is a flexible loan that can be acquired through a lender once and reused as the outstanding balance is repaid. Unlike an installment loan which advances proceeds once and is repaid as a declining balance over time, a Personal Line of Credit functions much like a credit card.
With a Personal Line of Credit, a pre-defined amount of money (the credit line) is made available to the borrower and can be repaid all at once or at intervals (often weekly or monthly). As the outstanding borrowed balance is repaid, the credit line becomes available once again to be borrowed.
How does a personal line of credit work?
A Personal Line of Credit is more convenient than an installment loan when there is a recurring need for cash or if the borrower is uncertain of how much money will be needed. Rather than having to apply for a new loan each time, the borrower can “advance” available money from their line of credit to use for vehicle or home repairs, improvements, unexpected family expenses, or to avoid a service outage.
Secured vs. Unsecured Lines of Credit
Secured Line of Credit
As the name implies, a “secured” line of credit has been acquired by exchanging ownership of an asset (such as a home or vehicle title) in exchange for access to the credit line. Often borrowers who are trying to establish a good credit rating will secure their line of credit using a depository account such as a savings or share certificate. While paying interest for a loan when you have access to cash may seem counter-intuitive, establishing (or re-establishing) good credit through a savings secured line of credit may enable you to make larger purchases such as a home without paying much higher interest rates over a longer term.
Pros and Cons of a Secured Line of Credit:
- Borrow at a lower interest rate by “guaranteeing” your loan with collateral
- Establish (or re-establish) a good credit rating by building positive repayment history
- In the event of default, your creditor has a legal right to claim your collateral (the promised cash or asset) to offset their credit loss
Unsecured Line of Credit
In contrast to a secured line of credit, an unsecured credit line is guaranteed only by the borrower’s credit history and promise to repay the loan. For this reason, an unsecured line of credit is often also referred to as a “signature” line of credit—being secured only by the borrower’s signature on the loan contract.
Pros and Cons of an Unsecured Line of Credit:
- No collateral is required to gain access to cash; only your credit history and promise to repay
- Avoid compromising ownership of your assets, such as your home or vehicle
- Your interest repayment is typically higher in an unsecured loan because a defaulted loan has no “collectability”
How will I pay it back?
When you borrow a Personal Line of Credit from HFS Federal Credit Union, our lines of credit function under a simple draw and repayment period process. During the “draw period”, you have access to the funds available in your line of credit. Advance all or some of the proceeds and spend at your own discretion as you need. Interest on the amount you draw from your credit line begins accruing right away.
Once the draw period finishes, the “repayment period” begins. During the repayment period, you can make a lump-sum payment to fully restore your credit line or make minimum payments to gradually pay back your outstanding balance. You can minimize interest accrual by repaying your entire outstanding balance at the beginning of the repayment period, but you have the flexibility to repay in increments if your cash-flow needs dictate it.
How to apply for a personal line of credit
How to apply for a Personal Line of Credit.
- Consider which type of line of credit is best for you. The lowest cost credit lines are typically those that use the available value in an asset (such as a home equity line of credit or auto
equity line of credit).
- Gather critical income information such as your most recent tax return and/or paystubs to provide accurate ability-to-repay information.
- Unlock any credit freeze orders you have placed with major credit reporting bureaus such as Equifax, Experian, and TransUnion.
- Evaluate the total amount of money you might need to access through your line of credit. You should be careful not to request a credit line that exceeds your ability to repay, but a large
enough credit line that your outstanding balance will not persistently remain near 100% of the credit line. This could cause your credit rating to decline.
- Once you have gathered necessary information and considered which type of credit line is best for your needs, use the phone number or web address below to apply and secure a quick, convenient decision from HFS FCU.
Apply for a Line of Credit with HFS Federal Credit Union
Contact our loan experts at (808) 930-1400 or apply online at https://hfsfcu.org/personal-line-credit/. Our experienced lending staff are ready to help you increase your spending power with a Personal Line of Credit.
