A personal line of credit is a credit facility offered by banks to those who are in need of immediate funds. It provides an alternative source of funds when cash inflows are irregular.
Features of Personal Line of Credit (PLC)
It is a flexible loan that allows you to withdraw funds as and when you require them. It is a great way of getting cash in times of emergencies since the amount is approved for a period and is readily available.
Every PLC has a fixed limit up to which you can borrow cash. Interest is applicable only on the outstanding balance, i.e. the bank does not charge interest unless you withdraw from the account. However, an annual or monthly fee is charged for this facility. These are unsecured loans. As long as your PLC account is open, you can make as many withdrawals and repayments as you want. You have to pay a minimum instalment every month once you withdraw from the account till the entire principal along with interest is repaid. You can use the withdrawn amount for any purpose.
Pros and Cons of Personal Line of Credit
- You have to pay interest only on the amount withdrawn.
- The Annual Percentage Rates (APR) are usually lesser than those of credit cards.
- You get the flexibility of use your credit limit the way you want. Borrow when you want to, reuse the account as many times as you want.
- Since it’s an unsecured facility, you don’t have to pledge any of your assets as collateral.
- Perfect for projects where the costs are uncertain and are likely to fluctuate.
- Mandatory annual or monthly fee irrespective of whether you withdraw money or not.
- APRs can change at the discretion of the bank, leaving you open to the risk of paying higher interest amounts.
- Interest is not tax deductible.
- Since cash is readily available, you will always be tempted to spend more.
- High penalties and interest rates for late payment.
- Having a constant high unpaid balance will affect your credit score.
A mortgage loan is a loan that is secured by a real estate property. It can be used for purchasing a new property, or alternatively it can be used by existing property owners to borrow funds for any purpose, by pledging their property as a collateral.
Features of Mortgage Loans
Mortgage loans require you to put up your home as security for the cash received. These loans are available with fixed and variable interest rate packages. You have to repay the loan as determined (in instalments) by the bank.
Pros and Cons of Mortgage Loans
- You get the funds you need to pay for the home you want to buy.
- You make fixed payments every month. Knowing how much you have to pay every month helps you plan and structure your monthly budget.
- You have the option to refinance the loan with another one when you find a cheaper option.
- Low interest rates when compared to personal loans.
- Variable interest can increase your interest payments in the long run.
- Interest is charged from the day of loan disbursement, irrespective of whether you use the money or not.
- Refinancing the loan has additional charges and fees.
- The bank could foreclose your home if payments constantly remain unpaid. This applies to Home Equity Line of Credit (HELOC) as well. A HELOC is a line of credit that the bank gives you based on the equity value of your home in exchange for your home as collateral.
- Banks charge very high fees for late repayments.
Points to Remember While Applying for a Mortgage Loan
There are a few things you need to keep in mind before you apply for a mortgage loan. Being eligible for a higher amount of loan does not mean that you have to apply for it. Applying for a higher amount means paying larger instalments as well. Review your monthly budget to see if you will be able to afford the repayment amounts. Banks take into consideration your Total Debt Servicing Ratio (TDSR). This depends on all your existing debts. Banks use this information to check whether you can afford the loan you are applying for, in addition to paying for your existing debt obligations. Fixed interest rates are applicable only for a specific term. After this, the rates can change at the discretion of the bank. Factor in this parameter when you calculate your repayment schedule.
Choose a loan based on the Effective Interest Rate (EIR) rather than the advertised rate. EIR shows the true cost of borrowing. No particular loan option is the best solution for all situations. Depending on your need, a mortgage loan might be a better option than a personal line of credit, or vice versa. A PLC is a great option to get cash when you have an irregular income or unpredictable expenses, provided you can repay the borrowed amounts at the earliest. A mortgage loan is a good solution when you know how much money (lump sum) you need to buy a home and are sure of paying the instalments on time.