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Payday Line of Credit

A payday line of credit or cash advance is a kind of financing that even those with bad credit take advantage of.

The way a payday line of credit works is simple the lender gives the borrower a line of credit they can use until payday. The credit charges are then paid off with the borrower’s next paycheck. The payday lender makes a profit on the arrangement by charging a high rate of interest.

The difference between a payday line of credit and a payday loan is that the payday loan is an advance of money that the borrower always to payback. The payday line of credit is an advance of credit that the borrower can choose to use or not.

How Payday Lines of Credit Work

Most of the online payday lines of credit and the payday lines of credit advanced by banks and credit bureau are based on direct deposit. The borrower sets up an account and agrees to direct deposit of their salary or government benefit.

The borrower is then allowed to make charges using a credit card. The amount of the charges and an amount of interest are then taken from the salary or benefit when it is deposited.

A good way to think of this arrangement is that it is an equity line of credit in which the borrower’s paycheck is used for collateral. Nobody will be allowed to sign up for these lines of credit without opening an account and signing up for direct deposit.

Direct deposit means that the salary or benefit is deposited directly into the account electronically. This guarantees that there will be funds available to pay off the credit balances.

Advantages and Disadvantages to a Payday Line of Credit

The principal advantage to a payday line of credit is that a person who has bad credit or low income will be able to make purchases without cash available. Another advantage is that the person can limit their borrowing to what they need and restrict the amount to be paid back.

The disadvantage is that a percentage of the individual’s salary or benefit will be used to payback the credit. If too much credit is used, the borrower may end up in a situation where no money is available from their account.

A big disadvantage is that the borrower could get “hooked” they could use so much credit that they use up all of their salary. The borrower would then have to use the line of credit to pay for their day to day expenses and use up the next paycheck as well.

Use a Payday Line of Credit Carefully 

A borrower should use a payday line of credit very carefully. A good rule of thumb would be to only use such a line of credit in emergencies and pay it back right of way.

Individuals should check and see if they other lines of credit not linked to salaries available such as credit cards or home equity lines of credit before using a payday line of credit. A payday line of credit should only be used as a last resort.