How Revolving Lines Of Credit Work

How Revolving Lines Of Credit Work

Your income might be enough to cover your day-to-day, expected expenses. But what happens if something unplanned comes along, such as the illness of a pet, a car breaks down or a surprise bill? If you would have difficulty paying for an unplanned expense from your savings or income, you aren’t alone. A survey conducted by the Federal Reserve Board found that four out of 10 adults would have difficulty paying a $400 emergency expense.

You can apply for a revolving line of credit in store or online.,

While a surprise expense can throw your budget off balance or present a hardship to you financially, there are ways to work around it. One option is to use a personal line of credit to cover the cost. The Fed survey also found that 9 percent of people would either obtain a personal line of credit or an installment loan to help pay for emergency expenses.

Is a revolving line of credit a good option for you? Learn more about what it is and how it is different from other types of loans.

What Is Personal Line of Credit?

A personal line of credit is a kind of loan. It’s also known as a revolving line of credit. When you have a line of credit, you are given a credit limit, such as $1,000. You have the option of borrowing up to the full amount of your credit line or of borrowing less. You’re only responsible for repaying the amount you borrow — plus additional interest and fees.

In many ways, a personal line of credit is similar to a credit card. In fact, a credit card is an example of a revolving line of credit. With a credit card, you have a borrowing limit. Once you’ve repaid what you’ve charged to the card, the borrowing limit resets to the original amount and you can charge more purchases to your card.

When you obtain a personal line of credit, you receive the money you need to borrow in the form of cash. You can withdraw or receive the full amount of your credit line or a portion of it. To repay the loan, you can either pay the minimum amount due until the balance on the loan is paid off, or you can choose to pay more at once. You have the option of repaying the entire balance in one go if you have enough cash to do so.

Unlike other types of loans, there are no restrictions on how you use the cash you receive from a revolving line of credit. A few common ways that people use a line of credit include:

  • Making a Deposit: If you need to make a deposit to rent an apartment or house, to lease a car, or to obtain a secured credit card, you can open a personal line of credit and use the cash to do so.
  • Funding a Large Purchase: A personal line of credit can also cover the cost of a big purchase, such as new furniture.
  • Cover Ongoing Expenses: Sometimes, your income isn’t enough to cover ongoing expenses. Your income might be irregular so that the size of your paychecks vary from week to week or month to month. You can use the cash from your credit line to cover your bills until you receive your next check.
  • Pay for Birthday Gifts or Holiday Expenses: A personal line of credit can also help you cover the cost of irregular expenses, such as the holidays or birthdays.
  • Emergency Fund Cushioning: One benefit of a line of credit is that it is there when you need it, meaning it can serve as a financial cushion or back-up should a surprise expense or financial emergency occur.

Traditional Installment Loans Vs. Personal Lines of Credit

A personal line of credit isn’t the same as traditional installment loan. Let’s take a look at the differences between the two.

First of all, if you apply for an installment loan of $5,000, you receive the $5,000 all at once. You are then responsible for repaying the loan over a set period. The payments you make are installments. The amount of each payment depends on the repayment period and the amount of interest on the loan. Usually, the longer the repayment period, the lower the monthly payment, but the greater the interest. A shorter repayment period translates to larger monthly payments, but usually less interest paid overall.

What is the difference between a personal line of credit and an installment loan? Let's take a look!

Another considerable difference between an installment loan and a personal line of credit is that installment loans are often designed for a specific purpose. In some cases, the purpose of the loan can serve as the collateral. Car loans and mortgages are two examples of installment loans. You can only use a car loan to buy a car, and you can only use a mortgage to buy a house. Once you get the car loan or mortgage, your car or house secures the loan. That can mean your interest rate is lower than if you didn’t have collateral on the loan. It also means that if you aren’t able to make payments on the loan, the lender can claim your car or house.

Not all installment loans are secured loans, though. A personal installment loan and student loans typically don’t have collateral behind them. They also usually have higher interest rates than secured installment loans.

Cash-2-U’s Offers Both Auto Title Loans and Personal Lines of Credit

Another type of loan you might consider when you need cash quickly or as a payday loan alternative is an auto title loan. Auto title loans are a type of installment loan, and as such, operate differently from our our revolving lines of credit.

With an auto title loan, your current car serves as collateral on the loan. To apply for this type of loan, you need to own a car outright, meaning you can’t still be paying off your car loan. That said, your car doesn’t have to be new, fancy or even in particularly good condition to qualify for the title loan. There are a few requirements your car must meet:

  • Age: Your car should be under 20 years old
  • Ownership: You need to own the vehicle, and there can’t be any liens on it.
  • Value: The car’s condition and age affect its value, which influences the amount you can borrow.

In addition to the requirements on your car, in some cases, there are also minimum income requirements you need to meet to qualify for a title loan.

Well, what about the difference between an auto title loan and a personal loan? We cover that, too!

Since the value of your car influences the amount of an auto title loan, it’s occasionally the case that you can borrow more at once with a title loan than you could with a line of credit. Title loan amounts often range from $200 to up to $10,000. Since a title loan is a type of installment loan, you borrow the full value all at once and repay in monthly installments. The amount of your monthly payments depends on the value of the loan.

Once you’ve made the final payment on an auto title loan, that’s it. If you want to borrow more money against your car, you will need to reapply for a new loan and start the process over again. In contrast, with a revolving line of credit, once you’ve paid off the amount you’ve borrowed, the credit line frees up again, and you can borrow more, if needed, without having to apply for a new loan.

How to Apply for a Personal Line of Credit

There are a few eligibility requirements you need to meet before you can apply for a personal line of credit. To be eligible for a line of credit you need:

  • A Job: Before you can apply for a personal line of credit, you need to have a history of steady employment. Depending on where you live, you will need to have been working at your current job for at least 90 days. In some areas, you need to have been working at your current job for at least 180 days.
  • A Bank Account: You need an active checking account to qualify for a revolving line of credit. The account needs to have been open for at least 30 days. When you apply for the loan, you’ll be asked to present a voided check and a bank statement.
  • A Phone: Either a landline or cell phone is fine, as long as it works.
  • Identification: You’ll need a photo ID, such as your driver’s license or state identification card.
  • Minimum Monthly Income: Along with having a job, you’ll need to show that you earn at least a certain amount of net or after-tax income. Depending on location, monthly income minimums range from $800 to $1,000 in Virginia. Income from your job, entitlements and other earnings can all count towards the minimum.
  • A Social Security Number: You’ll usually need to present your social security card or otherwise present proof of your social security number.

When you start the application process for a revolving line of credit, be sure to review the interest rates and fees charged. For example, a revolving line of credit will have a semiannual fee, as well as an APR for interest.

Although some types of loans, such as an auto title loan, require you to apply in person, you can apply for a personal line of credit online. You’re likely to receive a response to your application quickly, in some cases, within 15 minutes. If you aren’t comfortable submitting your information online, you can apply for a line of credit at a Cash 2 U location. Just make sure to bring in all of your documentation, including your bank statement, paystubs and ID, when you come in.

How to Pay Back a Personal Line of Credit

Once you’ve applied for and been approved for a personal line of credit and have received your cash, the repayment process begins. You have two options for repaying a Cash 2 U revolving line of credit.

Learn how to apply for a personal line of credit.

Option 1: Authorized Payment

With Option 1, you authorize Cash 2 U to automatically debit the minimum payment due on your loan each month from your checking account. You still have the option of paying in another way, such as by calling or by coming into the store to pay in person. With the authorized payment option, you get a discount on the annual percentage rate.

Option 2: Non-Authorized Payment

With Option 2, you agree to make at least the minimum payment due on your line of credit in person. You can use cash to make your payment or a credit or debit card. If you can’t make it into the store, you can call and pay over the phone with a credit or debit card. You don’t get a discount on the APR with the non-authorized payment option.

Learn more about personal lines of credit and revolving lines of credit now.

Get a Revolving Line of Credit at Cash 2 U

If you are in a tight financial situation, a revolving line of credit may be able to give you some flexibility and freedom. You’ll get the cash you need to pay for surprise expenses or to make a deposit on a secured credit card or apartment, quickly. With a revolving line of credit, you might feel better prepared to handle the little surprises life throws your way. Find the Cash 2 U location that is nearest you and begin the application today.