Compare line of credit loans
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There are many types of loans specifically designed to suit the lifestyle and financial needs of different people at various stages in their lives.
And for those borrowers who have already built up some equity in their home but require a degree of financial flexibility, a line of credit (LOC) loan may be an effective solution to helping them meet their needs.
So how does a line of credit loan work?
Essentially, these loans function similarly to a credit card, where you are allowed to borrow up to a certain amount of money within a fixed period of time set by the lender, but there are significant points of differentiation from other loans, based on how borrowers can manage the process of their withdrawals and repayments.
The key features of the line of credit loan are:
- During the life of the loan you can withdraw money as you need it and you do not need to notify the lender what the funds are being used for each time you withdraw.
- As you pay back the principal amount, your creditamount continues to revolve and you can use those line of funds again as you need to withdraw money.
- You only make repayments based on how much you borrow, against your maximum, pre-approved amount. This is where the line of credit is similar to repaying debt on a credit card.
- You can pay back any amount as long as you make the minimum monthly payments set by the lender. Minimum payments may be a combination of interest and principal, or interest only.
- As the loan structure is not viewed as traditional in nature, the interest rate is usually set above the standard variable rate by banks and financial institutions.
How does a line of credit loan differ to a personal loan?
The line of credit loan is different to a personal loan, where you get a lump sum and you agree a fixed or variable interest rate and have a fixed term for repayment.
As a line of credit loan is secured against your home equity, unlike a personal loan which is often unsecured, the interest rate on a line of credit loan is usually lower than on a personal loan.
How does a line of credit loan differ from a credit card?
As with a personal loan, the interest rate on the line of credit loan is also generally lower than that on a credit card, which is why some borrowers choose to opt for this loan, rather than simply increasing their existing credit card limit or taking on a credit card.
What would you use line of credit loan for?
In many cases, line of credit loans are used by people whose borrowing needs vary and who therefore want some flexibility around withdrawals and repayments.
These types of loans are often used for:
- Home renovations and repairs
- Buying another property
- Taking a holiday
- Buying a car
For example, you may have equity in your home and are considering whether you do a major renovation or make a series of repairs and minor alterations.
You don't necessarily know how much money you will need, so opening a line of credit can give you the flexibility to pursue your project knowing you can draw down sufficient money to complete it.
Being smart about your line of credit loan
Financial discipline and organisation will help you manage your debt on a line of credit loan. There are several simple ways you can utilise its features to your full advantage:
- One common way of reducing the cost of the loan is to have your income deposited into your line of credit loan account to offset the overall loan amount. That way the interest on the loan is only calculated on the remaining balance of the account, which will lower your overall interest charges.
- Likewise, any planned or unexpected income that you receive, such as a tax refund, can also be deposited into the account as an additional repayment which contributes to reducing the interest payable.
- Another possible way to manage the loan effectively may be to set repayment amounts above the specified amount as part of your regular fortnightly or monthly budgets. This limits the tendency to use more of the funds without thinking of the financial ramifications.
- Always remain conscious of the original estimated value of your home that the approved loan amount was based upon. If property values in your area or those within the property market in general are not increasing, be prudent in your use of the line of credit loan so your home equity still remains a comfortable proportion of the total value of your home, against the size of the outstanding loan amount.
What should I be aware of with these loans?
As with every loan, it’s worth evaluating not only the benefits of the loan but also the potential risks, such as the high interest rate attached to these loans compared to other more traditional loans.
Some tips to consider:
- Remember that this loan is most suited to those who are financially disciplined and remain committed to making regular repayments and gradually reducing the loan.
- This may not be an appropriate solution for those borrowers who see the loan as a quick fix to a funding shortfall. Those borrowers may find they are still overstretched financially and then have continual problems with their repayment schedule.
- You need a good credit rating to apply for these loans, so before you submit any applications, check your rating and determine whether you can do anything to improve it. The better it is, the greater the likelihood you'll have of being offered a lower interest rate.
- As with a standard variable loan, the interest rate on a line of credit loan is vulnerable to the overall market movements of the interest rate environment. Ensure you have a realistic financial buffer in place with the loan to cushion the impact of any series of interest rate rises.
- Some lenders may also charge monthly or annual fees as well as application fees, valuation fees and discharge fees, so you need to factor all costs into your financial calculations when comparing line of credit loans from a range of different lenders.
- As with more traditional loans, if a line of credit loan isn't repaid according to the terms of the contract, the lender may be able to seize your property in order to recoup the debt.
Line of credit loans are offered by most banks, credit unions and financial institutions and can be a valuable way of supporting you to manage your finances throughout stages of your life where you require some flexibility as you continue to work towards your goals.
However, with an increasing number of loans to choose from, comprehensive research remains the key to determining which loan will be most appropriate for you and your particular circumstances.
Senior Financial Writer
Mark Bristow is a senior financial writer for RateCity and an experienced analyst, researcher, and producer. Working for over ten years, Mark previously wrote and researched commercial real estate at CoreLogic, and has seen articles published at Lifehacker and Business Insider, among others. Most recently, Mark has joined RateCity working across finance as a whole. Whatever the topic, Mark’s goal is always to provide simple solutions to complex problems.
Frequently asked questions
How much are repayments on a $250K mortgage?
The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.
For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.
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What is a building in course of erection loan?
Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.
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The money you pay back to your lender at regular intervals.
What is the amortisation period?
Popularly known as the loan term, the amortisation period is the time over which the borrower must pay back both the loan’s principal and interest. It is usually determined during the application approval process.
Your current monthly home loan repayment. To accurately calculate how much you could save, an accurate payment figure is required. If you are not certain, check your bank statement.
What is appraised value?
An estimation of a property’s value before beginning the mortgage approval process. An appraiser (or valuer) is an expert who estimates the value of a property. The lender generally selects the appraiser or valuer before sanctioning the loan.
Remaining loan term
The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.
How common are low-deposit home loans?
Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.
However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.
Does each product always have the same rating?
No, the rating you see depends on a number of factors and can change as you tell us more about your loan profile and preferences. The reasons you may see a different rating:
- Lenders have made changes. Our ratings show the relative competitiveness of all the products listed at a given time. As the listing change, so do the ratings.
- You have updated you profile. If you increase your loan amount, the impact of different rates and fees will change which loans are the lowest cost for you.
- You adjust your preferences. The more you search for flexible loan features, the more importance we assign to the Flexibility Score. You can also adjust your Flexibility Weighting yourself, which will recalculate the ratings with preference given to more flexible loans.
Does Real Time Ratings' work for people who already have a home loan?
Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.
Why is it important to get the most up-to-date information?
The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.
We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.
Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.
What is a construction loan?
A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.
What is a specialist lender?
Specialist lenders, also known as non-conforming lenders, are lenders that offer mortgages to ‘non-vanilla’ borrowers who struggle to get finance at mainstream banks.
That includes people with bad credit, as well as borrowers who are self-employed, in casual employment or are new to Australia.
Specialist lenders take a much more flexible approach to assessing mortgage applications than mainstream banks.
What is the ratings scale?
The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.
How often is your data updated?
We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.
Do other comparison sites offer the same service?
Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.
How much information is required to get a rating?
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How often you wish to pay back your lender.