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Line of Credit Terms

A borrower should always pay close attention to the terms of the line of credit agreement. The terms dictate the amount of the line of credit, the interest and ultimately the cost of a line of credit.

Not carefully reading line of credit terms can get a borrower into a lot of trouble very quickly. Lenders are very good at writing terms that enable them to get as much money as possible out of a line of credit at the borrower’s expense. This means that a borrower always has to read the line of credit agreement to understand what the terms are.

Don’t believe the lender’s employees when they tell you what the terms are. Read the agreement and see for yourself. A borrower should always remember that the lender’s representative may make a commission every time they open a new line of credit. This means the lender and its employees have every incentive to lie a borrower to get them to sign an agreement.

Some Line of Credit Terms to Look Out For

There are a number of terms in line of credit agreements that borrowers should watch out for because these terms can cost you money.

The first term to watch for is adjustable rate or adjustable interest rate. This means that the lender has the right to raise the interest rate and the cost of the line of credit in the future. Try to avoid lines of credit, especially lines of credit that have an adjustable rate. This can quickly increase the cost of a line of credit.

Other terms to watch out for are those requiring fast repayment. Hard money, cash and other online lenders will quickly hand out high interest lines of credit.

These lenders make their money back by requiring it to be repaid very quickly. These lenders may have terms that mandate that a large payment be made within a month.

Another trick that lenders, especially credit card lenders; try to pull is to require the borrower to pay a large fee when you open a line of credit. This fee is often spread over several months of payments but it can substantially raise the cost of credit.

Finally lenders will offer quick approval of line of credit but not tell the borrower what the line of credit will be. This means they might offer a line of credit with high fees and interest rates and a miniscule line of credit.

Getting Better Terms

There is no reason to accept any line of credit until you have read and understand the terms. Always take time to read the terms over a couple of times before you open the line of credit.

Don’t let a lender rush you into signing up for a line of credit without reading the terms. Read the terms carefully and ask about anything you don’t understand. If you don’t get a good explanation it might be a good idea to look elsewhere.

Another suggestion is to have more than one person read the terms of a line of credit. If you have a friend or relative who is knowledgeable about banking or financing have them take a look at the terms. If a lot of money is involved it might not be a bad idea to your attorney take a look at the line of credit agreement. Even just having a friend, relative or business partner read the line of credit agreement can give you a valuable second opinion.

If you spot terms you don’t like in a line of credit agreement you don’t like ask the lender if they can be changed. Always remember that you are the customer and you have the right to request changes.