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Thursday, 10 April 2008 |
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This is a good question and not one in which people understand very well when thinking about their financial lives. When you think about your finances and you think about buying different products in your life, you have the need for a loan at times and you will need for a line of credit at times. This article explains when you will use a loan and when you will use a line of credit. To give the technical definition, a loan is money lent to you for a certain period of time with a fixed interest rate and a fixed monthly payment. You know when you will have the loan paid off at the time that you take out the loan and your paperwork will reflect this fact.
Your mortgage is a good example of a loan. Another example is a car. You are able to choose how long you want the loan to go along with the payment you want by talking with your local banker or the car dealership. An important point to remember is that the shorter the loan duration will equal less interest paid over the life of the loan. When you think about your monthly payment, there is a certain amount which goes towards principal and a certain amount goes towards interest. Starting with the first payment, only a small portion goes toward the principal and the lion’s share goes toward interest. As you progress further into the loan, the amount going to principal increases. A line of credit is for any purpose which you may not know at the time. You may use a line of credit check to pay off a monthly bill. The interest that you pay will be variable and is based upon the prime rate. The prime rate is an interest-rate set by the Federal Reserve. Hopefully this article can help you understand the difference between a loan and a line of credit. It is important to understand the difference between these because each of these financial products has its uses and its place within your financial life. |
