It’s easy to confuse credit cards with lines of credit. Truthfully, a line of credit functions similarly to credit cards. However, it’s best to think of it as an “open-ended” loan.
A personal loan is “fixed-ended” financing. You declare the ideal loan amount in your loan application. The bank or moneylender will provide you with the final personal loan amount you can borrow, the final interest, and the repayment schedule.
With a creditline, you can declare your initial ideal amount. Then, before you reach the maximum amount, your bank or lender will inform you that you’re going over credit limit. You can over the limit without bank charges if your credit allows it as part of the service.
Already, it sounds like it’s better than a credit card. But is it?
What is a Line of Credit?
A credit card has a fixed amount you can borrow and need to repay in full every month to avoid additional interest. On the other hand, a credit line functions similarly to a credit card with plenty of payment and spending flexibility.
Furthermore, a line of credit gives you higher initial credit limits with interest rates lower than credit cards, especially if you’re a preferred borrower. Additionally, you can pay the minimum monthly dues of a cash line to continue using the funds. This feature is much better than banks halting your credit card use to resolve your ballooning interest rate repayments.
Differences Between a Line of Credit and Personal Loan
Truthfully, it sounds like a personal line of credit functions similarly to personal loans. While both provide ample funding for borrowers, it has significant differences in flexibility, features, available types of financing, repayment terms, and more.
Unfortunately, both types of financing are suitable for specific situations. For example, a line of credit is much more useful for retail and consumption-oriented borrowers. On the other hand, a personal loan is better as a “financial bridge” to meet needed objectives, such as college enrollment, down payments, and others.
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Features
A line of credit is accessible at any time. Banks and other financial institutions will not question your need to use the line of credit. Your already-approved income and employment information facilitates your access to the funds at any time.
On the other hand, general-purpose personal loans allow you to borrow a fixed amount of money. You’ll need to pay for it over a fixed amount of time with a consistent interest rate.
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Loan Type
Most financial institutions consider a line of credit as a “revolving” type of financing. It has an indefinite term period, making it inconvenient for both lenders and borrowers to have a high-interest rate with no risk basis. Truthfully, most borrowers with a line of credit is a low-risk and highly-preferred borrower of a lender.
Alternatively, a personal loan is a fixed-term loan. Often, banks and moneylenders allow borrowers to pay for 1-7 years. Both financial institutions investigate documents to verify the monthly salary and create a risk profile of borrowers.
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Repayment Schedule
The best feature of a line of credit is the ability to use it even if you’re just paying the minimum monthly payment on your borrowed amount. The minimum amount does increase proportionately to your debt. Additionally, the interest rate increases yearly only.
With a personal loan, you must pay a regular fixed amount monthly. If your loan ranges beyond one year, you’ll pay your fixed yearly interest increase on top of your principal monthly payments.
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Total Loan Amount
Your initial credit limit for a line of credit is smaller than personal loans. You can only have 2-4 times your monthly salary for an average line of credit limits. However, if you are earning more than S $120,000 yearly, you can have 10 times your monthly salary as a credit limit.
With personal loans, you can borrow from 4-10 times your monthly salary. The Monetary Association of Singapore (MAS) caps the total amount you can borrow up to 12 months.
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Interest Rates
A line of credit is much more expensive when it comes to interest rates. Borrowers who pay only their minimal dues per month will have to deal with an 18.5-19.8% interest yearly on their outstanding debt. However, if borrowers have paid all their debt for the year, they can avoid paying high fees.
On the other hand, paying for increased yearly interest rates with personal loans is inevitable, especially if your financing stretches beyond a single year. Fortunately, the interest on top of your principal is lower, with only 3.7-5.43% added every year.
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Fees You Need to Pay
A personal line of credit has an ongoing fee that ranges from S $80 – S $ 100 per year. This amount is on top of the interest and total debt amount you have by using the line of credit.
Personal loans only have a one-time processing fee that ranges from 1-3% of the amount you’ve borrowed. Furthermore, banks and lenders can’t go beyond S $200 for processing fees.
Things to Consider When Applying for a Line of Credit
It’s easy to give in to advertisements about OCBC Cashline or HSBC Personal Line credit lines. Their offers make them seem accessible and easy to gain approval. However, you’ll need to dig for more information to find a line of credit that offers you enough, won’t place you in deep debt, and is manageable throughout the time you intend to use it as a revolving source of financing.
Here are a few things you need to know to learn the best way to compare different kinds of personal credit. Some of these concepts can be similar to choosing the best personal loan, depending on your annual income.
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Interest Rates
True enough, interest rates make or break the appeal of a personal line of credit. However, make sure you know the way banks and financial institutions calculate them. A line of credit’s interest rate is unlike a personal loan and credit card because it has higher interest.
Like typical personal loan applications, banks and other lenders can give you the option to secure your personal line of credit for lower interest rates and higher credit limits. You can significantly expect better offers if you have exceptional assets to use as collateral.
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Fees
You’ll need to dig up service fees and other charges you might receive even when you’re working with dependable financial institutions and licensed moneylenders. You’ll often find them by reading the fine print, similar to a credit loan or personal loan. Like a regular loan, fees greatly depend on whether you’re paying for a borrowed amount after one year or 2 years and beyond.
In most cases, the personal line of credit advertisements does not display its annual fee and other additional fees you’ll usually encounter during the first year. You can list down all the fees you receive during your use of the personal line of credit and add them to your loan repayment total.
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Repayment Terms
Some banks consider personal loans to be a personal line of credit. Therefore, it has a fixed interest rate, loan tenor, and regular debt and repayment schedule.
On the other hand, you can receive offers for a revolving line of credit. You can consider it a pre-approved personal loan that you can use to safeguard against any possible financial maladies you might encounter. Like credit cards, you only gain additional interest rate value on your spending total.
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Accessibility of Funds
Truthfully, personal loans offer the best accessibility against a line of credit. However, you will receive the full value of your personal loan available in your bank account. You can only do so after going through a lengthy application and risk assessment process (if you’re taking out financing from banks.
Credit lines do not require you to go through a lengthy risk assessment. Furthermore, you can use it at any time, similar to a personal loan. While it offers the same accessibility, credit lines reflect as debt and not as deductions in your bank account.
Advantages and Disadvantages of a Line of Credit
Here’s an in-depth look at the benefits of credit card and risks of using lines of credit.
Advantages
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Charged For What You Use
For most credit lines, such as HSBC personal credit lines, you only receive interest on amounts you have borrowed. Therefore, if you have an 18% yearly interest, it only applies to your spending total. If you paid off all your debt early, you wouldn’t have many problems too.
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Easily Accessible Funds
Most of the time, credit providers will allow you to link credit lines with your debit card. Furthermore, select ATMs and kiosks allow you to withdraw directly from these lines up to your regular credit limit.
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Flexible Payment Terms
You won’t need to worry about banks breathing down your neck and pressuring you to pay your outstanding debt. While it is not clearly an advantage, it’s a lifesaver in many situations, you just need emergency cash.
Disadvantages
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Higher Fees and Charges
If you’ve seen the credit limit and interest rate credit lines have, you’ll want to treat it with the utmost respect when you use it for spending. While you can’t determine your fees immediately until you and the financial institution finalize your contract, it’s essential to spend wisely to avoid penalties and high-interest charges.
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Lenience Leading to Overspending
In most cases, both banks and moneylenders award personal credit lines to individuals with excellent and stable annual income. Furthermore, if you’ve paid off a financial commitment beyond 2 years with flying colors, banks will likely approve your application for credit lines.
Truthfully, credit lines have lenient rules that can easily lead borrowers into deep debt. Therefore, careful spending is crucial to achieving great things with your credit lines.
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High Penalties for Missed Repayments
Lastly, banks have their rights reserved charging you with high penalties plus interest on missed repayments and other misuses. You should frequently scrutinize the terms and conditions to learn about the penalties you can incur with credit lines before applying.
How to Apply for a Personal Line of Credit
Banks and financial institutions evaluate the following in every application:
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Assets and Liabilities
Collateral can help lower the credit line’s interest rate. Banks and financial institutions accomplish this by investigating your background after you declare all your assets and liabilities.
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Income
Singaporeans with exceptional proof of ongoing steady income, especially beyond ten years or more, are prime candidates for banks. You’ll need to show payslips, bank statements, or whichever documents your financial institution requires.
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Identification
Lastly, you’ll need to provide the financial institution with a current and valid photo ID and other essential documents that establish your physical address.
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