Tag: borrowing money

Lines of Credit and Other Types of Borrowing

Lines of Credit and Other Types of Borrowing

As suggested above, there are many similarities between lines of credit and other types of borrowing, but there are also many important differences that borrowers need to understand.

Credit cards

Like credit cards, lines of credit effectively have preset limits – you are approved to borrow a certain amount of money and no more. Also like credit cards, policies for going over that limit vary with the lender, though banks tend to be less willing than credit cards to immediately approve overages (instead they often look to renegotiate the line of credit and increase the borrowing limit). Also like credit cards, the loan is essentially pre-approved and the money can be accessed whenever the borrower wants, for whatever use the borrower intends. Lastly, while credit cards and lines of credit may have annual fees, neither charge interest until/unless there is an outstanding balance.

Unlike credit cards, lines of credit can be secured with real property. Prior to the housing crash, Home Equity Lines of Credit (HELOCs) were very popular with both lending officers and borrowers. While HELOCs are harder to get now, they are still available and tend to carry lower interest rates. Credit cards will always have monthly minimum payments and companies will significantly increase the interest rate if those payments are not met. Lines of credit may, or may not, have similar immediate monthly repayment requirements.

Lines of Credit and Other Types of Borrowing

Loans

Like a traditional loan, a line of credit requires acceptable credit and repayment of the funds, and charges interest on any funds borrowed. Also like a loan, taking out, using, and repaying a line of credit can improve a borrower’s credit score.

Unlike a loan, which generally is for a fixed amount, for a fixed time, with a prearranged repayment schedule, there is much greater flexibility with a line of credit. There are also typically fewer restrictions on the use of funds borrowed under a line of credit – a mortgage must go towards the purchase of the listed property and an auto loan must go towards the specified car, but a line of credit can be used at the discretion of the borrower.

Pawn Loan / Payday Loan

There are some superficial similarities between lines of credit and payday loans, but that is really only due to the fact that many payday loan borrowers are “frequent flyers” that frequently borrow, repay, and/or extend their loans (paying very high fees and interest along the way). Likewise, a pawnshop or payday lender does not care what a borrower uses the funds for, so long as the fees/loans are paid/repaid.

The differences, however, are more considerable. For anyone who can qualify for a line of credit, the cost of funds will be dramatically lower than for a payday/pawn loan. By the same token, the credit evaluation process is much simpler and less demanding for a payday/pawn loan (there may be no credit check at all) and the process is much, much quicker. It is also the case that payday lenders will seldom lend the amounts of money often approved in lines of credit (and banks will seldom bother with lines of credit as small as the average payday or pawn loan).

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Why you shouldn’t borrow money from friends

Why you shouldn't borrow money from friends

Need some money? Don’t ask your friends or family. Find out why.

For many people, there comes a time when it becomes absolutely essential to borrow money to pay important expenses or make bills. If you are late with a lot of bills, you could end up facing huge costs for late fees, utility shut-offs and other penalties. You could damage your credit and you could end up facing eviction or the repossession of your car.

Unfortunately, many people go through these kind of financial problems at some point in their lives and they need to find somewhere to turn for help.

If you are facing any kind of financial problem, from unexpected home or car repairs to being unable to pay bills, you may be tempted to turn to your friends or family members in order to get the money that you need for your bills. The reality, however, is that this is almost always a terrible idea.

Borrowing money from friends and family should be an absolute last resort only after you have exhausted other possible loan options that may be available to you. There are myriad reasons why you should never even borrow money from friends or from family members unless or until you have exhausted all possible other resources and are in a truly emergency situation.

Why you shouldn't borrow money from friends

Some of the many reasons why you don’t want to borrow from family and friends include the following:

You could put your family or friends in an uncomfortable position

Many people in the United States today are living paycheck to paycheck and your friend or family member that you ask for money may not actually have any cash to spare to give you, even in a temporary basis.

When you ask them for money, you’ve thus put them in a very uncomfortable position. They might have to admit to you that they are also facing financial struggles, which could be something that they don’t really want to say to you.

If they are a close friend or a close family member, they may also feel too badly to say no to your request especially if they know that you really need the money.

The result could be that your friend or family member lends you money that he or she doesn’t really have to give and thus you could drag someone you love into a bad money situation.

You could ruin the relationship and be uncomfortable whenever you spend time together

Owing someone money can make you feel very beholden to that person, even if they don’t say anything and are gracious about giving you the loan. You could feel uncomfortable and no longer like the equal of the person that you borrowed money from. This can undermine your relationship and make it less fun for you to be around a person who is important in your life.

The person who you borrowed money from could also become resentful of the fact that you took the loan, especially if they see you spending cash on something else or if they feel that you are taking too long or not trying hard enough to pay them back. You do not want to take a chance on alienating the people in your life who you care about because of a financial transaction.

You could end up being unable to pay the loan back

People generally do not borrow money with the intention of defaulting on the loan and not paying it back (especially when they borrow from a family member or a friend).

Unfortunately, sometimes life gets in the way of your best intentions. Even though you have every intention of paying back the person that you borrow from, you could end up simply being unable to do so.

This is likely to make you feel a tremendous amount of guilt and it is likely to make your friend or loved one feel resentful and possibly feel financial pressure as a result of the bad loan.

These are just a few of the many reasons why you do not want to take a chance of borrowing from a family member or from a friend. Instead, consider all other possible sources of loans available to you.

Even people who have bad credit may be able to obtain a car title loan from a trusted provider like TitleMax.com or a loan through a bank or other lender. Apply for loans and exhaust all options available before you ever even consider asking someone you love or care about for money.

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