Disaster strikes and your car needs an urgent repair when you have zero savings. Borrowing money might be on the docket in situations like these — whether your emergency is an unexpected auto repair, medical expense, or something else entirely.
A revolving line of credit is one of many online options that act as a stopgap to savings. But it’s different from the typical installment loan that closes when you pay it back, as it stays open after you make payments.
For some, a line of credit is a flexible option that can help with multiple emergencies. But for others, it’s an irresistible temptation of extra cash.
What is a Revolving Line of Credit?
A line of credit is a type of personal loan that assigns a pre-set maximum amount you can borrow. You won’t receive these funds upfront, nor do you have to use them all at once. Instead, you can choose how and when you access this limit.
Someone with a line of credit can immediately withdraw up to their maximum limit or slowly syphon cash in small withdrawals over time.
You will only pay interest and finance charges on the amount you use, when you use it — not your total limit. How much you pay depends on your lender, as each one sets its own prices.
If you borrow from a lender like Fora, you can easily check your costs by signing into your online profile. Every Fora Credit line of credit comes with this convenient account so that you can check your rates and terms, billing cycle, statement, and other important details.
A line of credit earns its title as a revolving financial product because of the way you can access these funds. Every time you pay off what you owe — bringing your outstanding balance to zero — you effectively clear any holds on your account. Full payments release your credit so that you can borrow up to your limit again.
How a Line of Credit Can Trap Some Spenders
By now, you know a line of credit is different from the typical installment loan because it never closes; as long as you pay off your purchases on time, you’ll have access to these funds.
That’s where the temptation comes in. It can be hard to resist these funds knowing you have access to extra cash at any moment. You can dip into these funds for whatever you want, even if it’s for clothes, tech, or a vacation you can’t normally afford.
These spending traps can hurt you. That’s because you’ll earn extra interest and finance charges if you don’t repay what you use on time and in full. This adds to what you owe on the next billing cycle ad infinitum until you pay off your balance.
In the meantime, your balance will tie up an increasing amount of your limit until you have no more room for emergencies.
Tips to Use Your Line Responsibly
A line can be a helpful financial tool if you use it properly. Here are some basic tips to keep you from overspending:
- Only withdraw funds for unavoidable, unexpected, and urgent expenses.
- Tweak your budget to free up more cash towards its payments.
- Budget to pay more than the minimum to reduce interest.
When used properly, a line of credit can be a convenient and flexible safety net in emergency situations. Remember these tips if you decide to apply for one today.