Leveraging Lines of Credit for Short Term Financial Goals

When it comes to managing financial emergencies, being able to adapt and get your hands on the money you need can make a huge difference. That's where lines of credit can sometimes come in handy! They can help you navigate through different kinds of financial ups and downs, as long as you understand how to use them responsibly. Today, we’re going to look at some of the ways that a personal line of credit may be able to help you with short term financial goals. Short term goals could include things that could still take months or even years to accomplish. This could be things like paying off all your debt, or building an well-stocked emergency fund.

Understanding Lines of Credit

So, what is a line of credit exactly? A line of credit is a type of a revolving credit product which allows you to draw funds from a credit limit, which is the maximum amount you can borrow from. You only pay charges on the amount you draw, not your entire credit limit. This is different from an installment loan, through which you get funds in a lump sum.

You can look to apply for a line of credit in person from a brick-and-mortar institution, or you can apply for an online line of credit from an online lender or service provider.

Types of Lines of Credit

There are a few different types of lines of credit out there. Let’s take a look at some of them in a bit more detail.

1. Personal Line of Credit

First up, we've got personal lines of credit. These are personal loans you can usually apply for without having to put up any collateral, like your car or house, which is something we’ll touch more on later. Your eligibility is typically based on your credit history, your income, and certain other factors. You can use them for different personal needs, but they’re generally intended to be used to help you deal with emergency expenses.

2. Home Equity Line of Credit (HELOC)

Unlike most personal lines of credit, a home equity line of credit is a bit different because it’s backed by the equity in your home. They're generally less risky for the lender because of the collateral you’re providing. HELOCs also may have higher credit limits and are often used for big expenses like home renovations.

Knowing the Difference Between Secured and Unsecured Lines of Credit

When you're thinking about applying for a line of credit, it's important to understand the differences between secured and unsecured options. They're different when it comes to their purposes and what you need to qualify for each.

Secured Lines of Credit

These ones are backed up by something valuable you own, like your house, car, or other pricey stuff. It's like a guarantee for the lender that they'll get their money back, even if you can't pay. Home Equity Lines of Credit (HELOCs) and secured personal lines of credit are good examples.

Here are some of their key characteristics:

Collateral Requirement: You need to put something valuable on the line, like your car or house, so the lender gets some sort of value if you’re not able to make your regular payments. This can be a big risk to take for borrowers.

Higher Credit Limits: These personal loans usually have higher credit limits, depending on the specific type.

Lower Interest Rates: They may have lower interest rates because lenders know they’ll be able to recoup at least some of the value of the loan because of the value of collateral that you’ve provided.

Longer Application Process: Application processes can sometimes take longer because of the collateral component.

Unsecured Line of Credit

Like we’ve mentioned, an unsecured personal line of credit isn’t going to require collateral. Outside of that let’s take a look at some of the other important aspects of them to consider:

Lower Credit Limits: You might not be able to borrow as much since lenders don’t have the safety net of collateral.

Higher Interest Rates: They often come with higher interest rates than secured loans because the lender's taking a bigger risk without any collateral.

Quicker Application Process: Generally speaking, the application processes are shorter. This is especially true with an online line of credit, where the majority of the application and verification process happens online.  

Choosing Between a Secured and Unsecured Line of Credit

When it comes to using a line of credit to help you meet your short term financial goals, deciding which one's right for you depends on your situation, how much risk you're willing to take, and what you need the money for. If you’re comfortable with the collateral aspect of a secured line of credit and there’s one that suits your needs, that might be the way to go. But if you don’t want to risk an asset or you need funds quickly for an emergency, an unsecured line could be the choice.

A chain and lock on a green barn door.

Knowing the difference between these two types of lines of credit can help you make smart choices about borrowing money that fits your financial goals.

3 Potential Benefits of a Personal Line of Credit for Short Term Financial Goals

Now, let's talk about why lines of credit can potentially be useful to help you with certain short term financial goals. Here are three potential benefits to consider.

1. Flexibility

Compared to certain other types of personal loans, a line of credit may provide flexibility. Instead of borrowing a lump sum, you can just borrow what you need from your available credit.

2. Useful in Emergencies

When you’re facing an emergency expense, your emergency fund should be your first line of defence. But if your emergency fund is tapped out and something unexpected comes up, an online line of credit can be a lifesaver.

3. Easy Application Process

When it comes to online lines of credit specifically, the process of applying for one is generally fast and easy. You can apply from wherever you have internet, most if not all of the process happens online, and you can usually get notice of whether or not you’ve been approved fairly quickly.

8 Ways to Use a Personal Line of Credit Effectively

Now, when it comes to using lines of credit, it’s important to use them properly and responsibly. Here are some tips to make the most of them.

1. Define your Objectives Clearly

Be clear about what you need the money for. Before you apply for a line of credit, figure out exactly what you're going to use it for and how much you need.

2. Borrow Wisely

Don't go overboard. Just because you have access to credit doesn't mean you should use it all. Be realistic about what you can afford to pay back and don’t tap into your revolving line of credit unless you really need to.

3. Do Your Research

Before applying for the first line of credit you find, check out a few different ones to see what might be available. Look for rates and terms that work for your financial situation, and make sure you fully understand how the line of credit works.  

4. Maintain a Healthy Credit History

Keep your credit in good shape. Having a good history may help you qualify for better rates and terms on your line of credit. So, make sure you're paying your bills on time and keeping up with good financial habits.

5. Have a Repayment Plan

Don't just borrow money without a second thought. Come up with a plan for how you're going to pay it back, and stick to it. Making more than the minimum payment can help you pay it off faster and save on interest in the long run.

6. Don't Forget About Your Emergency Fund

Earlier we pointed out that an online line of credit can be a lifesaver when things go south financially, but it shouldn't be your only safety net. Make sure you've got a stash of cash set aside for emergencies that can cover your expenses for a few months. That way, you won't have to rely solely on credit if something unexpected comes up.

7. Set Up Automatic Payments

Don't risk missing payments and getting hit with late fees or penalties. Set up automatic payments for your personal line of credit so you never have to worry about missing a due date. Whether it's paying the minimum or chipping away at your balance each month, automating your payments will keep you on track and save you some headaches.

8. Keep Your Finger on the Pulse of Your Finances

Things change, and so do your financial needs. Regularly check in on your short term financial goals and borrowing habits to make sure you're still on track. If things have shifted or your goals have evolved, adjust your borrowing strategy accordingly to keep your finances in line with where you're headed.

A person in a suit and tie holding a pen and looking at a line of credit contract.

Use your Line of Credit Smartly

A line of credit can be helpful for your short term financial goals, as long as you use it wisely. Take the time to understand how it works, what types are out there, and how to best approach using it. Just remember to borrow responsibly, pay on time, and have a plan for paying it back.

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.

Posted in: Line of Credit