This is a good question and not one in which people understand very well when thinking about their financial lives. When you think about your finances and you think about buying different products in your life, you have the need for a loan at times and you will need for a line of credit at times.
This article explains when you will use a loan and when you will use a line of credit.
A loan is when you receive a lump sum of money under set terms and conditions for repayment, with a set interest rate and monthly payment. For example, your mortgage is a loan. The terms of the loan are fully disclosed to you when you receive the money so you know exactly when you are expected to have the loan paid in full.
When purchasing a car you obtain a loan. You can discuss with the car dealer or your banker the terms that best fit you and what you want the life of the loan to be. Of course the shorter the life of the loan is the less you will pay back in interest.
When you think about your monthly payment, there is a certain amount which goes towards principal and a certain amount goes towards interest.
Starting with the first payment, only a small portion goes toward the principal and the lion's share goes toward interest. As you progress further into the loan, the amount going to principal increases.
A line of credit works differently in that it is an amount of money available to you to use when and as you see fit. You may set up a line of credit without having a specific purpose for the money at the time. Interest rates for lines of credit are figured based on prime, which is established by the Federal Reserve.
Hopefully this article can help you understand the difference between a loan and a line of credit. It is important to understand the difference between these because each of these financial products has its uses and its place within your financial life.
This article explains when you will use a loan and when you will use a line of credit.
A loan is when you receive a lump sum of money under set terms and conditions for repayment, with a set interest rate and monthly payment. For example, your mortgage is a loan. The terms of the loan are fully disclosed to you when you receive the money so you know exactly when you are expected to have the loan paid in full.
When purchasing a car you obtain a loan. You can discuss with the car dealer or your banker the terms that best fit you and what you want the life of the loan to be. Of course the shorter the life of the loan is the less you will pay back in interest.
When you think about your monthly payment, there is a certain amount which goes towards principal and a certain amount goes towards interest.
Starting with the first payment, only a small portion goes toward the principal and the lion's share goes toward interest. As you progress further into the loan, the amount going to principal increases.
A line of credit works differently in that it is an amount of money available to you to use when and as you see fit. You may set up a line of credit without having a specific purpose for the money at the time. Interest rates for lines of credit are figured based on prime, which is established by the Federal Reserve.
Hopefully this article can help you understand the difference between a loan and a line of credit. It is important to understand the difference between these because each of these financial products has its uses and its place within your financial life.
About the Author:
Are you looking for information about how to pay off credit cards faster? You'll get plenty of helpful information on the Debtopedia website where you can get a free copy of my special report "Secrets Of Credit Card Debt"
Posts
No comments:
Post a Comment