Are you planning on renovating your house over the next several years, but you don't know how much it will cost? Perhaps you foresee long-term medical costs that may not be completely covered by your insurance. Maybe your twin daughters surprised you by getting accepted to Ivy League schools, and you need to fill in the financial gap. A line of credit is one financial strategy to tackle large and unpredictable or variable costs.
A line of credit is a type of loan that doesn't give you one giant injection of funds the way a traditional loan does. Like a credit card, you draw on the credit when you need to pay for something that is financially out of reach. Unlike most credit cards, the interest rates on lines of credit are generally low, and the limits tend to be high.
There are several reason why a person may choose a line of credit over a traditional loan. With a traditional loan, you get a chunk of money and immediately begin paying the loan back, regardless of when you actually use the money. But a line of credit lets you borrow the amount you need when you need it. With most lines of credit, you make payments only on the credit you've actually used.
Let's explore the types of lines of credit and which factors decide whether or not you'll qualify for one.