Whenever you borrow money, you want to make sure you’re making the right decision. Rushing into things might solve your initial problem quicker, but it can lead to bigger problems later.
In your haste to get a line of credit, you may accept fees that you can’t afford. Or perhaps you get blindsided by hidden fees concealed by the fine print you didn’t read.
If you would rather avoid these costly mistakes, take the time to understand your options. This list of pros and cons is a fantastic place to start.
What is an Online Line of Credit?
When you need to borrow money in an emergency, you generally have two options. You can take out a term loan or an open-ended credit account.
A line of credit is an open-ended (or revolving) account. This means you’ll be given a credit limit from which you can make as many withdrawals as you want up to this limit.
Once you withdraw enough to reach your limit, you won’t be able to borrow beyond this point. However, your limit will reset once you pay off what you owe. You can do this as many times as you want, which is how it earns the term “revolving”.
Compare this to a term loan, which advances a set amount of money. Once you pay back what you owe, you can tap into this loan again. The only way to access more money is by applying for another term loan.
When you see the word ‘online’ in front of this revolving account, it means most (if not all) of the process unfolds online.
An online lender like Fora hosts a virtual application on its website 24/7, letting borrowers apply any time they want. If you’re approved for a line of credit through Fora, you may make withdrawals from and repay your account online, too.
Pros of an Online Line of Credit
Here are three basic reasons why people borrow an online line of credit.
1. It Helps in Unpredictable Emergencies
A line of credit might be a more convenient way to borrow, especially if you don’t know how much your emergency will cost. That’s because you can borrow up to your limit any way you want, as often as you want.
Let’s explore this in an example.
Suppose you qualify for a $2,000 line of credit when your car breaks down. You can withdraw $500 from this limit to make the initial repair, but you also have the remaining $1,500 at your disposal.
If your car needs another part or a different repair, you can make additional withdrawals of up to $1,500 in any denomination. Best of all, you will only pay interest and fees on the amount you use, not your limit.
2. It Can Become a Reliable Safety Net Over Time
Since this account won’t close like a term loan, it will remain open once you pay off what you owe.
Any time you pay down your balance to zero, you replenish your line of credit. At this point, it won’t accrue any interest because there isn’t an outstanding balance, but it won’t close either. Your account will go into standby mode, available when the next emergency arrives.
3. It Has a Minimum Payment
Ideally, you pay off what you use by the due date. This will limit how much interest your balance accrues and free up your full limit for the next emergency.
In reality, you might not be able to pay your full balance in one go. You might run into another emergency or need to withdraw more funds, making it impossible to cover everything.
The minimum payment is an option in these difficult situations. It’s the least amount you have to pay to avoid late fines and other delinquency penalties. As a fraction of your balance, it might be easier to pay this until you have the money to pay more.
Cons of an Online Line of Credit
Here are simple reasons why some people avoid lines of credit.
1. It Can Be Costly
How much a line of credit will cost you depends on your lender. Each lender will perform a credit check as part of their underwriting process. They do this to see if you’re creditworthy, or likely to pay back what they lend you.
If you have bad credit, a high debt-to-income ratio, or other red flags in your financial past, some lenders may deny you outright for funding. Other lenders may be willing to work with you, but they may apply higher interest rates.
2. Paying the Minimum Can Prolong the Debt
The last pro of the list can turn into a con if you over-rely on the minimum. Since the minimum is only a small portion of your balance, it will take longer to pay off your debt in smaller chunks.
But more importantly, paying the minimum means you’ll carry over the majority of your outstanding bill to the next month’s statement. There it will accrue more interest, so you’ll be gaining debt the longer you keep a balance.
This is true even if you don’t make any more draws against your limit. As long as you have a balance, you’ll accrue interest that increases what you owe.
3. It May Be a Constant Temptation
Ideally, you only ever use your line of credit in unexpected situations, when you can’t delay or pay off an expense by any other means.
However, once you have a line of credit, you can use it however you like as long as you have space left. That includes unnecessary shopping, even if it’s inadvisable.
Dipping into your line of credit when you don’t have to can lead you to take on more debt. It can be challenging enough to pay off a line of credit you used in an emergency without adding more to it because you couldn’t say no to a sale.
It’s Time to Weigh the Pros and Cons
Now that you know the pros and cons of a line of credit, it’s time to decide if one side outweighs the other. If you still think borrowing a line of credit is a good idea after this thought experiments, check out the lenders available to you today.
