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What is a Line of Credit Loan?

First Alliance Credit Union

First Alliance Credit Union About The Author

May 17, 2018 7:25:00 AM

Young happy businesswoman holding bills of dollars in officeFinancing unexpected life events can be easier with a line of credit loan. You only advance funds when you need it, and only make payments when you have a balance, meaning you have more control over your finances. It is improtant to consider the different types of lines of credit loans, as each can be beneficial depending upon your specific needs and financial goals.

Overdraft Protection Line of Credit

A line of credit for overdraft protection is when you have a special line of credit, usually with a relatively small limit between $500 and $1,500, that is linked directly to your checking account. It's sole purpose is to cover overdrafts as they occur to avoid paying an overdraft fee that would normally be charged. This way you don't have to worry about a bill not being paid on time while your are in between paychecks. You can also usually advance the line of credit on your own by transferring funds in your online banking account to cover unexpected expenses as they arise.

However, it is important to pay attention to how frequently you are using this line of credit. You do have to pay this money back, just like with a credit card, and their is an interest rate applied to each payment. Missing a payment to your line of credit will also affect your credit score just like any other loan or credit card you have. It is important to use a overdraft protection line of credit loan as a back up plan, having this type of loan does not mean you don't have to pay attention to your spending.

Read More: The 5 Best Ways to Avoid Overdraft Fees

Home Equity Line of Credit (HELOC)

A home equity line of credit uses your home's equity like a credit card essentially, it can help you finance a wide variety of larger expenses from home remodeling to education expenses and weddings, or even debt consolidation. There are of course advantages and disadvantages of using a home equity line of credit to finance your goals. The best advantage are the low interest rates and potential tax advantages that come with a HELOC. 

However, it is important to remember that a home equity line of credit is an additional mortgage on your home, so there are a lot of items to consider when thinking about a home equity line of credit.  There will be closing costs and fees involved, and if you were to default on payments you may risk losing your home.

Read More: Pros and Cons of a Home Equity Loan

Credit Cards

Even though most people don't think of a credit card as a loan, they really are. Credit cards are actually the most common type of line of credit loan. They are so common in fact that most retail stores offer their own credit cards. Credit cards are a great way to help build credit, repair credit and simply have just in case of emergency. There are several different types of credit cards to consider, each with their own pros and cons, but when used correctly a credit card really can help improve your overall financial picture. 

However, if misused credit card debt can add up quickly, putting you behind on payments and ultimately damaging your credit score. It is very easy to overspend on a credit card especially around the holidays, so it is imporant to know what you are capable of paying back. It is also important to remember that having too many credit cards can hurt your credit score, one or two cards is all you really need.

Final Thoughts

As you can see, there are different types of line of credit loans. It's important to evaluate your entire financial situation before deciding which loan may be right for you as each come with advantages and disadvantages.