Traditional loans offer lump sum payment and have high interest rates; on the other hand, a line of credit offers you the perk of constant funds with low interest rates.
Active investors are always on a lookout for investment opportunities which could enhance their portfolio. Since opportunities like these don’t come regularly; an investor has to be prepared in every way to make sure that he/she does not miss the same. Most importantly, they try to keep a sufficient amount of funds handy while trading, to which they tend to use numerous financial tools which also includes a line of credit.
What is line of credit?
In simple words, a line of credit is a facility offered to an individual by the financial institutions, where he or she can keep a loan with the lender, without being charged till the amount is utilized. Moreover, the line of credit can be used by an applicant multiple times.
How does it work?
The line of credit works like a credit card. Applicants have to first apply for it first by going through the standard loan procedures and then the lender offers a certain amount as line of credit. The amount will be sanctioned in the account of the applicant after approval. No interest will be charged, till the applicant/investor withdraws the amount and puts it to use. Once the investor withdraws certain amount from line of credit, the lender initiates the interest cycle which has to be paid along with loan repayment. Furthermore, the investors can withdraw the amount again from the line of credit, after the loan has been repaid.
Benefits of applying for line of credit.
- High loan amount: Most investors tend to confuse line of credit with credit cards. The best way to understand the difference between them is the amount. A line of credit offers a much higher amount for loan as compared to a credit card.
- Flexibility: A line of credit loan can be used to fund almost anything. Investors can use it to buy shares, renovate their office or invest in other instruments. The only thing which has to be kept in mind is the repayment of amount.
- Short tenure: Unlike other loans which have tenures that range from 3 to 5 years, investors can end a line of credit loan as soon as 3 to 6 months.
- Low interest rate: Before approving any loan, the lenders ask for collateral from the applicant. In line of credit loan, the lender does not ask for collateral but still it has lower interest rate than a normal credit card loan.
- Tax deduction: A line of credit can also help an investor save on taxes. Since the loan has interest involved, the applicant can file for returns or deductions for them at the end of a fiscal year.
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