Many people don’t understand the differences between a loan and a Line of Credit. Here is where you will be amazed.
Loan – You go to the bank to borrow money. They pay for the item you are interested in (real estate, properties for sale, rental property, etc.) and you have to pay them back at scheduled intervals which include a set amount of interest and principle each month. The payment you send is only credited to your account once a month, no matter how many payments you send in a month. If you pay on the first and they credit that payment to your account on the 30th, that means they have your money to invest for free for 29 days. If that set payment becomes too much to handle, oh well, you signed a contract of some kind and you’re stuck.
LOC – Lines of credit are very different. The bank qualifies you for a line based on the equity in an asset (home, rental property, IRA, etc) or the provable income you make. That money is placed in its own account at the bank until you need it. If you don’t withdraw it, you do not get charged. That money can stay on standby forever if you like. Also, an LOC, in most cases (or ask for it), is on a variable interest rate that is not that high. I don’t like variable rates either, but it’s the kind you need to ask for to do what I’m telling you about.
The big point of an LOC is the accrued interest is based on the Average Daily Balance, which you can control. In an LOC, the payment you make is credited to the account the same day, and you can take it out tomorrow and it still counts as a payment. You can treat an LOC just like a checking account, if you ask for the right one. Most accounts offer either a debit card or checks and are able to make deposits and withdrawals at your leisure; if they don’t, it’s not what you want. Here is what I mean; a $10,000 line of credit at 8% interest has a balance of $5000. If you get a $5000 paycheck (just saying) and deposit it in this account, the balance goes to $0. I know you have to pay bills, hold on. If you can leave that money in the account till the 15th, that makes half a month of no interest adding up. A $5000 balance for half a month at 8% interest is the same as; either $2500 at 8% all month or $5000 at 4% all month, whichever way makes sense to you. It’s the same thing. You basically borrowed $2500, interest free. The longer you leave your money in there, the more interest gets cancelled. ALSO, the paycheck you put in there temporarily counts as the monthly payment and shows on your credit report as “paid better than agreed”. At the end of the month, what money is not spent will stay in the line to pay it back permanently. Neat, huh?
