First things first, what is a Personal Credit Line? In simple terms, it is a flexible loan wherein you can access a specific amount of money as needed. You repay only the amount you borrow through regular instalments. The interest in a credit line loan is charged only on the borrowed amount. Because of their flexible nature, instant credit lines are useful in financing irregular or unpredictable expenses.
A personal line of credit can be a very beneficial and handy tool. But much like other resources, it needs to be used wisely. There are certain common pitfalls borrowers make that could have been easily prevented.
So, here are four common mistakes borrowers make while getting a personal credit line and our tips on how to avoid them.
1. Not Knowing the Terms And Conditions
The terms and conditions for a personal line of credit may vary across different financial institutions. A common mistake borrowers make is not reading the fine print. There may be a difference between how an instant credit line product is marketed or explained by a salesperson and the actual terms of the loan agreement.
Some personal credit lines may have additional hidden charges, minimum borrowing requirements, or late payment fees. This could lead to you paying extra money that you did not account for, thus, making the credit line loan more expensive than anticipated.
How to avoid it: Read the loan agreement, personal credit line brochure, and website thoroughly. Ensure that you understand the fees, interest rates, and repayment schedule well. Also, do your research and explore multiple options before picking one and do not hesitate to ask questions.
2. Borrowing Over Your Limits
Having an instant credit line gives you access to a large amount of money that is not supposed to be spent all at once. However, individuals can make the mistake of borrowing more money than they are capable of repaying in a given time period.
Also, when borrowers do not have sufficient funds to repay a debt, they may borrow from other sources. This can start a cycle of constant over-borrowing that can lead to a debt trap.
How to avoid it: Only borrow money that you can safely and comfortably repay with your monthly income. Think about where you wish to spend that money and create spending limits accordingly.
3. Not Borrowing the Minimum Amount
Since credit line lenders make money off of interest charges. They stand to lose money if you do not use the borrowed amount. To encourage at least a minimum borrowing, some lenders may charge you a maintenance fee if you do use the money in your instant credit line.
With personal lines of credit, you draw money in irregular schedules and keeping track of the borrowing and calculating interests can get confusing – which adds another layer of complication.
How to avoid it: Carefully keeping track of your borrowing is the best practice to follow. This way you will know whether you are meeting the required minimum borrowing amount.
4. Making Late Payments
When you avail a personal line of credit, you have to pay the borrowed money through monthly repayments. These often have a deadline that needs to be strictly adhered to. If you do not make your repayments in time, it reflects poorly on your credit score. This can make it harder for you to get approved for loans in the future.
Most lenders also charge late payment fees. Thus, consistently making late payments can lead to a substantial expense. Some financial institutions may offer a grace period after the deadline, during which you can pay the instalment without incurring any late charges. However, paying after the deadline will still negatively affect your credit score.
How to avoid it: Make timely repayments for your credit line loan. Set up reminders or an automated withdrawal to ensure that you do not miss a deadline.
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