A line of credit is a pre-approved amount of money that can be borrowed and used in instalments or as a lump sum.
This ﬂexible loan provides people with the ability to consolidate all outstanding debts and reduce their loans quickly.
Lines of credit usually require the borrower to offer security for the loan, such as a principal place of residence or investment property. There is no defined term over which payments must be made because using the funds is entirely up to the borrower.
However, the balance outstanding at any time must never exceed the approved credit limit.
A line of credit requires borrowers to pay interest only on the money they use. Interest rates are variable and are generally lower than credit cards, even though the available credit limits can be much higher. Some lines of credit also allow borrowers to capitalise the interest until they reach their limit.
Most of these loans have a monthly or annual fee payable.
Lines of credit are popular with property investors. Those building a property portfolio and on the lookout for the next bargain in a growth area need their finance approved and waiting so they don’t miss out on good opportunities to buy when they arise. Investors after a capital gain can use the line of credit to purchase the property then use it to make the repayments.
Renovators only have to pay interest when money is drawn down to pay for each stage of their project. Also, interest paid on a line of credit used to purchase or improve income-producing property can be tax deductible. Discuss this with your accountant first.
Regular income can be paid into a line of credit to reduce the principal owing on the loan and, in the case of a property purchase, build equity. Longer-term investors can change a line of credit loan to a principal and interest or variable rate loan when it suits them to take advantage of cheaper interest rates.
As a general rule, lines of credit are suitable for people who are financially responsible, have no problems sticking to a budget and who are not tempted to spend just because money is available.