Lines of credit may be good as you’d only withdraw money you need, but is going through the obstacles just to get that loan worth it?
Since customers like to pick the right loan offers while avoiding bankruptcy — looking for the best, payable low-interest rate plan that is enough to cover expenses — many nowadays think it’s best to get a line of credit.
One best example of lines of credit is your credit card or debit card, which has a credit limit, or a cap on how much you can spend for a certain period.
For example, you get to use credit cards to buy groceries, gadgets, or other needs provided that you don’t go over the maximum credit limit set; and if you comply with an agreed fee and interest rate.
Credit limit is more like a credit card that you can withdraw money from, with funds available up to the credit limit. But the question remains: Is it smart to have one?
What is a Line of Credit
First and foremost, lines of credit are loans from a financial institution, often a bank, or a credit agency — acquired by either an individual, a company, or the government.
So this means that in availing lines of credit, a borrower seeks money and should return it, including the interest rate, in a later time or through an annual fee.
How Do Personal Lines of Credit Differ From a Personal Loan?
Line of credit deviates from the ordinary personal loans. If you would like to borrow $20,000 from a financial institution on a personal loan basis, the banks look at your credit rating, your financial history, how you use credit cards, monthly salary, annual income, possible outstanding balance, and other factors that may affect ability to repay bills.
The same goes with lines of credit – but this only one of the few similarities it shares with personal loans.
Once your loan application gets approved, the bank or the financial institution transfers the money into your account, enabling you to withdraw what you want as long as it is below the limit.
If you seek a $20,000 loan under lines of credit, the bank gives you the option of pulling out $2,000 from your credit account if you don’t need the whole $20,000 yet.
As you can borrow money in this scheme, this makes cash flow more flexible.
Also, withdrawing lesser amounts means you cannot be charged with the same extensive interest rate that a $20,000 personal loan entails. Instead, interest is charged only for the amount – or the $2,000 you withdrew.
Flexible payment schemes
Depending on your needs which forced you to consider a loan application, opening a personal line of credit can be a good idea if you want cash flow for large unplanned expenses. During an emergency, the personal line of credit is an extra source of funds which you can get money from, even up to your limit, during the draw period.
Like credit cards, you can use these again after paying the money you owe plus interest, as credit card revolving credit.
It’s a financial cycle because they get to use money in advance and settle them at a later date – either in annual fee or monthly repayment schemes. It also provides cash that one can use in unexpected incidents.
Unlike in personal loans and traditional loans where you’d be paying the borrowed money on a set date and a fixed interest rate, line of credit allows you to return it after you’ve exhausted your credit limit.
Usually, the financial institution and the borrower agree on a fixed limit on the amount of cash that could be borrowed for the credit lines.
Things to Consider
Despite the good sides to lines of credit, there are a lot of frequently asked questions about the loan. Will this result in lower interest rates? Would minimum monthly payments be high? Is this the best choice for me? Would the amount of cash you borrow and is now inside the account be too much?
Overall higher interest
First, interest rates of personal lines of credit are somewhat higher compared to a personal loan which have fixed interest rates. In the example above, if a customer would borrow $2,000 from his line of credit that has a limit of $20,000, then that customer would be billed for the interest of the $2,000 and not the whole $20,000 immediately.
But these interests accumulate as you make more transactions, in contrast to a personal loan where the customer’s scheduled payments already include fixed interests.
Interest rates would pile up slowly after months or years which will only be felt while the borrower repays it through the minimum repayment schedule – either years or months after lines of credit were approved. The good thing is you don’t immediately pay high-interest rates for the whole loan which you may have not yet used.
Repayment slightly differs from personal loan, as lines of credit have more flexible ways like repaying along the way — even if you still have money below your limit — or returning it plus interest once funds are exhausted.
But even if lines of credit are more flexible than personal loan, both have a draw period and a repayment period. The draw period is the time which a loanee can withdraw from the account.
And after this period ends — normally after several years with the first year or first 6 months or first 3 months sometimes exempted — the repayment starts and the borrower is required to repay the amount plus interest rate.
What Options Are Available in Singapore?
There are several lines of credit providers in Singapore, from bank and credit institutions, cooperatives like HSBC personal line of credit, while finance directory services like Instant Loan connect you to financial institutions offering these.
All of these firms offer varying terms which cater to various needs of a customer: Some offer low annual fees and interests, and low processing fee but only allow you to avail a low credit limit, while others may have high interest rates coupled with larger amounts.
For more information, you can use this table as a guide:
|Financial Institution||Good for:||Perks|
|HSBC||Long term lines of credit||Low interest rates for long term loans, exemption for first year of loan|
|Maybank||Loans with high credit limits||First year interest is only at 9.0 percent|
|DBS Cashline||Low income earners||Offers personal line of credit to people with annual salaries less than $20,000|
|UOB||Very short-term loans||Offers zero interest for first three months, plus possibility of processing fee being waived.|
How to Apply
To get a line of credit, approach a financial institutions — a bank or a matching agency like Instant Loan, physically or online — to assess whether your financial status, annual income, monthly income, monthly salary and lifestyle matches the loan you applied for.
Eligibility: You must be at least 21 years old, either a Singaporean citizen or a permanent resident, with a minimum annual income compatible with the financial institutions. Some allow a borrower to borrow an amount of $30,000 per year, while others offer lower caps.
Finances: financial institutions look at an applicant’s creditworthiness, based on the monthly salary, credit cards, and credit history. Credit scores also play an important role, as they give financial institutions an idea if you can settle accounts properly — meaning, any history of defaulting on a loan may not bode well for your loan application.
This indicates that you may have to review your credit ratings and prepare your financial paperworks that contain verified information about your job and monthly income, your average monthly expenses, where you live, and other issues that may affect your ability to repay the loan.
See, financial institutions would need assurance that they are not in a high risk by loaning some amount of money to a borrower who cannot pay on time. That’s another drawback to line of credit applications: banks scrutinize applications more due to the nature of the loan offers.
Most line of credit loans are unsecured loans, which means that banks do not require you to include one of your assets — be it a car, jewelry, or a property — as a collateral in case you fail to pay on time.
This means banks are in a higher risk with unsecured lines of credit as they cannot immediately possess your assets.
While there are secured line of credit modes, these do not come often.
Even though there are secured loan versions of the line of credit which may give you lower interest rates, people believe that having assets as a collateral while applying for such loans defeats the loan’s purpose.
Nobody wants his or her car or home possessed by a bank while you are using your line of credit for increasing hospital expenses? Or when your business is losing funds and income? Or just when you secured home loans to renovate your space?
Advantages and Disadvantages of Credit Line
As mentioned, a line of credit has a lot of advantages compared to other forms of loans, as you are able to withdraw a specific amount of cash that you may need for a certain time or a year— unlike being handed the whole sum of money you borrowed in a personal loan.
Major Advantage – Interest Rate
It was noted above that with a line of credit, interest rate applies only for your withdrawals, not for the whole loan which means withdrawing less from your credit account entails paying interest rate only for what was pulled out, and not whole loan funds.
Major Disadvantage – Inaccessible, Prone to Overuse
There is the issue of line of credit loans being almost inaccessible for people with lower annual income as banks would not want to risk loaning money to people who cannot pay lines of credit.
Also, banks scrutinize applications more due to the unsecured nature of line of credit.
And despite having control of withdrawals due to its flexibility — getting only what you need — there is a tendency to overspend using line of credit — similar to what happens with credit cards.
Generally, people seek unsecured personal loans or secured personal loans for specific planned usages: it can be a wedding, a vacation, buying appliances and gadgets, educational needs. The common denominator for all of this is that these have an exact amount or at least an estimate of how much funds you would need for a certain activity.
For example, if you plan a vacation on a fixed budget of $10,000, then it would be all you should seek for in a loan — which indicates that spending less results in a surplus of funds.
Line of credit, whether secured or unsecured, does not work that way. Such kinds of loans are sought by people looking for an almost instantaneous source of money in special cases like emergencies, a sudden lack of income for your business, uncontrolled and unexpected circumstances like car repairs and calamities — or thing that you don’t plan for.
So where does the spending splurge entry? Again, like credit cards, it is prone to overuse.
If a borrower already has existing lines of credit and if they do not encounter unexpected circumstances, it would be tempting to use the money for purposes other than emergencies and sudden expenses, like using credit cards for capricious purposes.
Like any other loan, getting a line of credit requires some pondering — first and foremost, if the financial institutions you talked to would even give you a shot at a credit line.
Then if you are confident enough that your bid would be approved even online, most of the considerations would center on whether you would really need a line of credit.
A lot of experts suggest that you should only get a line of credit when you do not have a fixed income. Aside from that, experts believe it is an overkill especially if you do not have the capacity to return even half of the personal credit line.
But if you are really determined, then maybe it is time to check loan offerings in Singapore, including those posted online at Instant Loan’s website. Access the site of Instant Loan to find out more about line of credit and the best bank or financial institution for you!