Line of Credit

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Line of Credit
Interest Only Line of Credit

The way an interest only line of credit works is simple, the lender lets the borrower pay only the interest on the credit used.

The borrower is still obligated to pay off all the credit used they can simply limit their payments to a percentage of the interest owed. This is how most credit cards work; when a person pays the minimum monthly payment they are paying the interest only.

The advantage to this arrangement is that a borrower can decide what they will pay on the line of credit. This can help a business or a person get through a period of financial distress or low cash flow. It can also give an individual or business an emergency source of credit.

How a Line of Credit Works

A line of credit is an agreement that gives a borrower access to an amount of credit they can use at any time. The lender makes money on a line of credit by charging interest on the credit that’s actually used. This is why lenders can give you an interest only line of credit they are still making their money even if you aren’t paying the line of credit off.

The problem with interest only line of credit is that lenders often charge much higher rates of credit on them. As with credit cards it is very easy to get in a situation where the borrower is only making only the interest charges and can’t pay the principal back.

This means that a person or a business should never use an interest only line of credit such as a credit card to pay for day to day expenses. Doing that will quickly use up the credit available and put the borrower in a situation where they have no credit available but a lot of credit to pay back.

Interest only lines of credit should only be used as an emergency means of finance. They should also be paid off quickly.

Finding an Interest Only Line of Credit

Almost all people and businesses have access to a kind of interest only line of credit that is easy to get: credit cards. A credit card is simply a device that allows a person or business to access a line of credit at any time. In fact that original name for credit cards was line of credit cards.

It is possible to get a credit card that gives you a much better deal on an interest only line of credit. The way to do this is to shop around by going on line and looking at credit card offers from many different lenders.

Don’t apply to the credit card offers that come in the mail. These are from lenders that charge high interest rates and give low amounts of credit. Instead shop around and find the best rate.

The lenders that give the best rates usually don’t advertise that heavily and don’t send out unsolicited offers. The better lenders want you to come to them.

Managing Your Credit

If you are stuck with a high interest rate on an interest only line of credit it might be possible to transfer the balance on that line of credit to one with a lower interest rate. Most credit cards will let you transfer balances. Transferring a balance on a line of credit with a high interest rate can save you hundreds of dollars on interest rates.