To examine the concept of line of credit along with liquidity, it is necessary to explain the difference between a line of credit and a personal loan. In many cases, you can use both for the same things. However, there are some contrasts. For instance, loans may be extended to consolidate debt, while lines of credit are intended to help clients whose monthly income is not sufficient or stable.
Personal line of credit is a good idea if one seeks to reduce monthly payments into one single payment, which has a low interest rate. In addition to this, you can borrow only the funds you need, and you do not have to apply again during the term of the line of credit. You can go online or call to inquire how much credit you have. The principal amount can be repaid any time over the credit line's term and in some cases, variable rate applies which is lower compared to the interest rate on loans. However, in some cases the line of credit just adds to the bills you are paying already. This is where we come into liquidity problems - the credit line itself is one. This is why it is important to use personal lines of credit wisely. If you want to purchase some expensive item, which you don't need, you should not buy it using a credit line. A line of credit is good to use when you face a cash emergency.
In fact, experts claim that personal lines of credits are emergency cash. At the same time, lines of credit come with some drawbacks as well. The interest rates may be lower than those on loans, but much higher than on HELOCs. In addition, lenders are more cautious when they determine whether to issue lines of credit. Personal credit lines are easy to access once you have been approved, which tends to lead people into the temptation of borrowing too much money. People borrow money from their personal lines of credit for things they could save money for, such as furniture, car repair, insurance and education costs. At the same time, many Canadians use personal credit lines to make home improvements, cover medical costs, consolidate debt, and buy used vehicles. The money is usually repaid in a year to a year and a half. Naturally, in Canada as everywhere, personal credit lines are more popular than HELOCs because not everyone wants to buy a home.
In terms of liquidity problems, risk-based pricing is another problem when determining interest rates. Some financial institutions do not use this factor, for example, certain credit unions do not factor it in. This means the interest is a bit lower (around 10 percent) if the payment is automatically deducted from the client's paycheck or account and slightly higher (around 11 percent) if another method is used to make payments.
Other establishments use risk-based pricing, which means the interest rates vary considerably - from 9 percent to 18 percent.
