What is a line of credit: Advantages and disadvantages
A line of credit is an economic term with which many companies and institutions are familiar, but also many individuals, who resort to it to have a more flexible financing in certain daily expenses. However, it is not always clear what it is and often it is confused with the traditional concept of loan. In this article we are going to clarify all this.
What is the definition of line of credit? It is an extension of money that a bank puts at the disposal of a client , during a determined period and with a stipulated maximum limit. In other words, it is like a current account with money that the bank provides to a client, with the proviso that this money is not from the client but from the bank. So the client can resort to that credit account whenever he wants within the established limits and, once the agreed period is over, the owner of the line must return the balance that was at the beginning. Meanwhile, the bank is charging operating fees and interest.
In contrast, traditional loans work differently. In them, a specific amount of money is requested and a payment schedule is established in which the expenses and interest of the loan as well as the amount borrowed are periodically settled. Once the payment schedule has been completed, the loan is extinguished, while in the case of the credit lines, it can be extended if there is an agreement between the entity and the client.
Main advantages and disadvantages of a line of credit
The great advantage of this financing channel is the flexibility in terms of the use of this available money, which can be accessed immediately every time, since it is in your credit account. The bank offers you a balance, but you can use only part of it based on your needs. Of course, the disadvantage of this situation comes precisely from the fact that the bank not only charges you for that willing capital , but also for the unwilling one . That is, you will be charged both for the amount you use, as for the amount you do not move at any time.
Coupled with flexibility is the convenience in handling that balance, since in practice it operates as an own account. For this reason, many companies use this method to finance the money circulating from their day to day, to always have the possibility of making payments to suppliers, payroll … even when they have liquidity problems.
However, one of the main disadvantages of credit lines is that they have more commissions than other means of financing , precisely because of this concept of “money always available”.
Once the advantages and disadvantages of a line of credit are clear, we will discuss those available for business, self-employed and daily expenses.
Line of credit for individuals and companies
As we have already seen, online microcredits offer great advantages over credit lines for individuals or companies that only need to solve a temporary situation of higher spending than expected. When in our personal financial balance or in that of our company, expenses weigh more than income, we usually find ourselves in a problem that needs to be solved as soon as possible.
The company credit lines are a good solution for large businesses and multinationals that can afford to interfere in large long-term projects. However, for SMEs or individuals who only need to correct a temporary situation of higher spending, online micro loans are a solution that fits better. Do you already know the lines of credit for individuals of Credy ?
Next, we are going to tell you what are the characteristics of a credit line with us.
Line of credit against online microcredits
If a client seeks the idea of ”money always available” to cover their backs against certain unforeseen events, one of the most interesting alternatives to credit lines is precisely online microcredits , such as those managed by Credy.es. It is true that these microloans online only allow you to request 750 euros each time, but it offers many other advantages.
How does a line of credit work? And an online microcredit? The margin of maneuver is practically equal of fast and immediate in both, since the average time that Credy is using between request and receipt of the money in account is of only about 15 minutes , which can be considered ‘ money instantly ‘.
Another of the great advantages is that the client only pays the fees of the money he uses, while in the lines he pays also for what is not used, as discussed above. That is, if we talk about unforeseen expenses, in the microcredits only pay when the unforeseen arises and request the amount of money, while in the credit lines is already paid in advance to have the available balance, ‘in anticipation’ that the unforeseen arises
Another area in which the lines of credit are losing is that of the bureaucracy. As usual with traditional banks, the requirements and paperwork required is very large. In fact, it is difficult to access one of these lines if you do not have a fixed job with a medium-high balance or if you are registered in the delinquent lists. With Credy, however, you can receive immediate credits without payroll , car loans and loans for people with ASNEF .
Finally, the balance is also on the side of online mini-credits in terms of ease of understanding . In this case it is not necessary to have advanced knowledge of economics, while to contract a line of credit it is necessary to be familiar with concepts that in many cases are complex. With the personal loans of Credy it would be enough to be clear about the following: amount , time of return and fees , which are specified in each stage of the application. In any case, assess well all the particularities of your personal situation and decide for the option that best suits your needs.