If you require some flexibility to finance a long-term project, then a line of credit may be the tool you are seeking. Available to individuals and businesses, a line of credit works in a similar fashion to a credit card but typically has lower interest rates and higher credit limits. Why not test yourself by taking this quiz before you decide whether this type of loan is for you.
What is a line of credit?
With a line of credit, the bank divides the loan principal into four payments to your account over a fixed period.
A line of credit is a debt consolidation loan, the bank pays off your credit cards and then cancels the cards.
A line of credit is a loan where you have a fixed maximum limit and write checks as needed over several years. A line of credit gives you flexibility to finance long-term plans without making payments on more money than you need to use immediately.
What is the main advantage of using a line of credit to finance a project versus using a credit card?
You will pay lower interest rates.
Contractors do not accept credit cards.
Credit cards are stolen often.
What is the difference between a secured and unsecured line of credit?
A secured line of credit has a fixed interest rate for the life of the loan.
A secured line of credit is backed by life insurance.
A secured line of credit is backed by your collateral.
What is the main advantage of an unsecured line of credit?
The lender places a lien on your collateral so you cannot sell it but they cannot seize it if you default.
You are not required to have any collateral in order to arrange the line of credit.
An unsecured line of credit has a variable interest rate that fluctuates with the prime rate.
What is an advantage of a line of credit over a traditional loan?
You make payments only on the amount of credit used.
The unused portion of the line of credit earns interest that is applied to lower your monthly payment.
Your monthly payments are a fixed amount regardless of the portion of credit used.
How many types of secured lines of credit are available to borrowers?
What is a typical secured personal line of credit that is available to individuals?
personal asset line of credit
home equity line of credit
401(k) line of credit
What is the set period of time that you may write checks on your HELOC called?
a cushion term
a draw term
a decade term
What would be a good reason to set up a personal line of credit?
You are planning an extended trip to Las Vegas with your partner.
You want to consolidate all your debits into one loan with favorable interest rates.
You have a series of upcoming medical costs and are unsure of exact amounts or dates for each payment.
What are the usual terms for interest calculation on most lines of credit?
fixed interest rate
variable interest rate
average interest rate adjusted once yearly
What would be the best reason for arranging a HELOC that you only make payments on the interest and do not pay down the loan principal?
Your payments over the draw term will be much lower.
You can always arrange a personal loan to pay the principal at the end of the draw term.
You know that you are going to receive a large amount of money at the end of the draw term.
What is the usual name applied to a home equity loan?
How does the lender typically require a business to secure a business line of credit loan?
Most lenders will require a business seeking a line of credit to provide a block of common shares as collateral.
Most lenders will require the business owner to provide a percentage of personal assets to secure the loan.
Most lenders will require a business owner to use the business assets as collateral.
What criteria does a lender use to determine if a business if worthy to receive a business line of credit?
profit and loss history
both of the above
In the United States, what factor has the greatest impact on interest rates charged on personal or business lines of credit?
Loan interest rates are set based on the prime interest rate charged by the U.S. Federal Reserve.
Loan interest rates are set based on performance of the stock and bond markets.
Loan interest rates are set based on money market rates and the price of gold.