Equity Line of Credit Basics

2008-09-24 13:51:02

( Financial )



What is an Equity Line of Credit?

An equity line of credit is a flexible credit facility that allows the borrower to borrow amounts up to a preset limit and paying the interest and principal also anytime during a limited period.

It is quite similar to having a credit card where you can borrow funds anytime to finance emergency needs or items that are beyond your personal budget limits.

Depending on how much you borrow, you have a payment deadline but you can also pay before the final due date. Equity line of credit rates are quite variable and change on day-to-day basis. The amount of interest you pay depends upon when you are paying the principal, and how much you are paying.

Businesses normally request for an equity line of credit facility from their depository banks. The practice is the same as with individual customers.

Equity lines of credit are normally secured by physical collateral such as real property. Business borrowers typically put up machinery, vehicles, inventory or other fixed assets to serve as collateral for equity lines of credit.

Equity Line of Credit Compared to Conventional Loan

As with a conventional type of loan, you have to put up collateral to secure the loan against any non-payment on your part. In case you fail to pay after a considerable amount of time, your lender has the right to foreclose on your property.

In terms of time periods, an equity line of credit usually has a shorter lending period of one to two years. During this time period, you may borrow any amount as long as you don't exceed a given total outstanding principal limit. In the case of a conventional loan, you already draw the entire loan amount at the beginning, then pay principal and interest gradually. You have the option to borrow on fixed or variable rate basis, but you must decide on which structure you want before signing the loan documents.

Upon its expiry, any outstanding amount in your equity line of credit is due and payable immediately. However, the equity line of credit may be renewed with your lender, depending on your credit history and payment performance. If you have been faithfully keeping up with your debt obligations and prove that you have the capability for a new facility, you can easily renew your equity line of credit.

Tips for the Individual Borrower

You may use the paid up portion of your home mortgage, or your home equity, to apply for an equity line of credit. Some lenders may also accept other types of assets as collateral.

You should take special care in monitoring your outstanding balances and keep them under controllable amounts. Always resist the temptation to borrow up to the maximum, and always schedule payments regularly.

You should also keep track of equity line of credit rates so that you don't end up paying too much on interest and too little on principal.


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