• Personal Line of Credit Vs Home Equity Line of Credit

    Personal loans give you a lump sum amount that you need to repay in fixed instalments every month. They are more suitable for a large one-time expense. Personal Line of Credit (PLC), on the other hand, gives you the option of borrowing multiple times from a credit account. They are revolving loans and are more suited for smaller expenses that come up every now and then.

    Personal Line of Credit

    PLC is a loan facility that banks and other financial institutions in Singapore offer for those who need funds intermittently over a short period. It usually has a tenure of a few months or a year at the most. PLC helps you in situations where expenses are unpredictable or if you have an irregular income. It gives you a periodic infusion of cash that can help you manage your weekly or monthly expenses.

    Features of Personal Line of Credit

    A personal line of credit is an unsecured loan. It gives you financial flexibility since you can use the money for purchases and expenses of your choice. Banks generally don’t place restrictions on how you should spend the money you borrow. The bank approves a certain extent of credit that you can withdraw from time to time. You can withdraw either the whole amount or parts of it, as and when the need arises. This feature is what makes it one of the best solutions for financial stability during emergencies.

    Every PLC has a fixed limit above which you cannot withdraw funds. You have to repay the amounts you withdraw as soon as possible. This helps replenish the credit line to the extent of the money you repay. If you are regular in your repayments and maintain good relations with the bank, they may even increase the credit limit if you need a higher borrowing limit. Banks usually charge a fee on an annual or monthly basis for the credit facility extended to you. You have to pay this fee whether you actually make use of the credit line or not. That is, even if you don’t borrow money you still have to pay the fee.

    However, interest is not applicable to the amount of credit the bank sanctions. Interest becomes payable only when you actually borrow money and don’t pay it back right away. You can reuse your line of credit as many times as you want. As long as your credit account is functional, you can withdraw and repay multiple times. Keep in mind that for every withdrawal you make, you have to pay a minimum monthly amount to the bank.

    Pros and Cons of Personal Line of Credit

    Pros

    • PLCs usually have lower Annual Percentage Rates (APR) than credit cards. Using this facility is a lot cheaper than taking a cash advance on your credit card.
    • Interest is not payable till you actually start withdrawing money from your credit account.
    • You have the freedom of using the credit line multiple times as long as you repay what you borrow.
    • PLCs are unsecured loan facilities and don’t require you to pledge security.
    • No restrictions on how you spend the money.
    • You get immediate cash since these loans are approved within a few hours or a day at the most.

    Cons

    • Banks expect you to pay the annual fee whether you use the credit facility or not.
    • APRs are changeable at the discretion of the lending bank and could make your monthly payments more expensive.
    • The interest amounts you pay on borrowings are not tax-deductible.  
    • You should have a good credit history if you want to be eligible for this facility.
    • Banks levy high interest rates on amounts that remain unpaid after the due date.
    • The ready availability of cash can always tempt you to borrow and spend more than you need to.
    • Being irregular with your repayments can leave a high unpaid balance that will adversely affect your credit score.  

    Home Equity Line of Credit (HELOC)

    HELOC is a lot like a personal line of credit, albeit with a few differences. It is more of a combination of a home equity loan and PLC.

    Features of Home Equity Lines of Credit

    HELOCs are like home equity loans in the sense that they too are secured loans since you have to pledge your home as collateral. In return, you get cash as a loan. However, instead of getting a lump sum amount like in a home equity loan, you get a line of credit to the extent of the equity value of your home. The equity value of your home is the value remaining after reducing the total of your outstanding mortgages from the current market value of your home.

    The bank gives you a line of credit to the extent of your home equity. You can use this facility to withdraw money as and when you wish, much like a PLC, up to the approved limit. You have complete control over how you spend the money. You can use it to finance your child’s education, pay for repairs on your home, or buy a car. The bank charges interest only on any amount that you actually withdraw and not on the entire credit facility granted to you. HELOCs have much longer tenures than PLCs, often for periods of up to 25 to 30 years.

    Pros and Cons of Home Equity Line of Credit

    Pros

    • The amount of credit you get is much larger than that of a PLC.
    • The life term of this credit facility is also much longer.
    • The flexibility of using the borrowings at your discretion.
    • Interest rates are usually lower than those of home equity loans.
    • No interest charges till you actually borrow money.

    Cons

    • Interest rates are variable. If they increase, your monthly payments will be more expensive.
    • Banks charge you an annual fee even if you don’t make use of the money.
    • Not paying your dues on time will result in high interest penalties.
    • Defaulting on payments can hurt your credit rating.
    • The bank has the option of foreclosing your home if you are unable to repay the debts.

    All things considered, both options give you the freedom of borrowing whenever you want. A personal line of credit is a good option if your financial needs are small and you plan to repay the debts as early as possible. A home equity line of credit is the better choice if you need a much higher credit limit and longer repayment periods. Keep in mind that they are both loans and that you need to repay them at the earliest. Before you apply for either of these facilities, examine your need and make sure you borrow only what you require. Over-borrowing is dangerous and could get you stuck in a vicious cycle of debt.

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