What Is a Secured Line of Credit?

In life, you will most likely have to invest in some sort of large transaction at some point. Perhaps it is buying a home for the first time, or maybe it has to do with paying off an expense. Whatever the case may be, you will have to speak with a lender to discuss your options.

One of the most common options that you will be advised about is using a credit card. Should you choose to not take out a credit card, you may be better suited to using a secure personal line of credit.

Here is what you should know about a secured line of credit:

What is a secured line of credit?

In the most basic of senses, a secure line of credit works similarly to a loan. What makes it different, albeit slightly, is that the line of credit is generally tied a possessed asset. For example, in order to take one out, you will have to put something up as collateral. Most borrowers use their home, for instance.

The secure line of credit can be tied to the home, or any sort of property you may have. Other borrowers may choose to tie their line of credit to a savings account as well. In order to take one out, something has to be given to the lender first. They want to ensure the process is the most riskless transaction possible!

Types of secured line of credit

What many borrowers may not be aware of initially is that a secure line of credit can come in varying forms. The most common type of secure line of credit is that of a HELOC, which is a home equity line of credit. When borrowers choose to get a second mortgage, for whatever reason, this option is given to them.

HELOCs work by using the equity built up inside of one’s home. The subsequent available money can be used for a variety of purposes, as intended by the borrower. Of course, the home itself is put up as collateral, in the event of monthly payments not being made. It is a flexible option, especially if a large sum of money is needed immediately.

How does a secured line of credit work?

As mentioned previously, a secured line of credit can be incredibly flexible. This is very much warranted, since every borrower’s situation will differ. For example, large renovations require an equally large sum of cash to fund the operation. Using the aforementioned HELOC can help expedite things for the better.

Additionally, even if you don’t use up all of the money immediately, you can store it for a later time. A secure line of credit establishes a set percentage whereby money can be drawn out from. You can use this money at the onset of your project, or for a future project; it’s totally up to you!

Interest rates

Loans will always carry an interest rate in some form. Depending on which sort of loan you go with, you may be able to secure a lower rate. Taking out a secure line of credit means that you will still have to contend with interest rates. However, for the most part, they are generally lower.

Lenders often see this type of transition is the least risk-attached. As a result, you won’t have to worry about paying back large amounts of money overtime. Interest rates can definitely add up overtime, especially if your terms are fixed for the long term. With a secure line of credit, you more than likely won’t have to worry about this being a debilitating factor.

Credit rating

Taking out a loan of any kind means that your finances will be inspected at some point. One of the main areas to be looked at is your credit rating. Generally speaking, if one’s credit rating is low, they won’t be given the loan they are looking for. As it pertains to a secure line of credit, a borrower’s luck increases.

A secure line of credit doesn’t necessarily require a high credit rating, in order to gain approval. However, the rating itself will still influence the terms of the line of credit in some form. To stay on the safe side, ensure that you keep your rating in good standing!

Collateral

Signing up for a secure line of credit means that something has to be put up for collateral. The asset you choose has to be valuable to the lender for the process to work out. Lacking in assets, such as a home or savings account, will make the process a bit more challenging.

When working with a lender of your choice, it is important to ask questions. Your circumstances will be always be different than another borrower. Therefore, ensure you get the clarification you need! That way, working with the secure line of credit can be much more manageable.