How to Determine Line of Credit Needed
A line of credit is essentially a loan, though one with different terms than a standard loan. For instance, with a line of credit, interest may only be charged on the part of the the money that gets spent with the balance remaining to be used as the borrower needs it. There may be a yearly fee charged on the the unused portion of the line.
- Identify the costs associated with
the purpose of the loan. For instance, if you are getting the line
of credit to go to college or to purchase a house, calculate how
much money you will need for those things. Include extra to cover
any unforeseeable expenses. - Find out about the interest on the
money you are borrowing via your line of credit. Fixed interest for
lines of credit are very rare. Note that the rate you pay will
likely change every time the interest rates are changed. Also note that the money you pay in interest will change every time you
use the line of credit. - Determine how long you will be
using the line of credit. Lines of credit are better suited for
projects where you will need money in installments over time, rather
than in one lump sum. The time will affect the amount of interest
you will pay for what period of time will you be requiring access
to the line. - Figure out your ability to repay
the figure arrived at in the above steps. This means that you must evaluate your
present sources of income. Your ability to repay the loan comprises
a significant part of whether or not you will be given the line of
credit.