Line of Credit
 

How does it work?

Let say I apply for 5000

And the interested the bank gave me is 6%

A loan works like 5000*1.06 = 5300 money you borrow + interest they charge

They say you signed up for 2 years term, 5300/2/12 = 220.83 monthly payment

But LOC is different?

Loc, usually u just pay the interest each month, no principal

At least on my home loc, not sure about unsecured.... But that would sound like just a loan

Still don't get it, can you do some calculations thanks :)

say you have 5000 dollar line of credit and you take out 2000.

you will have a minimum monthly payment to make. let's say a minimum monthly payment of 3% per month, so 3% of 2000 is $60 a month.

The interest you pay is 6% so that would work out to 0.06 * 30 (days of the month) / 365 days a year * 2000 (the amount you borrowed) = $9.86 a month in interest

If you take out more money for that month, the minimum payment and interest will be calculated from that amount you took out. Vise versa if you pay back more of that loan.

Basically whatever money you owe (ie the money you borrowed from the bank or haven't paid back for that month) will be used to calculate the min and interest for that month.

I'm pretty sure that's how it works, at least that's what I got from the bank when the dude explained it to me. Hope my explanation helps.

I see. I also heard: say if you take out 2000, first month, you repay the bank 1500, thus the interest they only calculate from 2000-1500 = 500, so the faster you repay the less interest money you have to pay them back??

^ tha should be right. Assuming you pay back the 1500 before the day they "bill" you which is the day they calculate the interest.

then you will only be charged interest on the 500.

Edit: You might want to talk to the bank or the person that is giving you the LOC. I'm pretty sure that's how it works but it's best you make sure for yourself with the actual bank.

All I'm going to say is make sure you understand what you're getting into before you sign anything.

Clearly you're not financially literate (not a knock), so don't trust the "nice lady at the bank" as she's a commission earning cunt who is just looking to sucker you into to some product.

Get educated on this option and all others out there

A line of credit is like a flexible loan you can borrow from if you need to.
If you are authorized a line of credit for say $1000, you can borrow a maximum of $1000.
If you take funds from line of credit, you are charged interest for borrowing the funds.
You don't get charged interest if you don't take any funds from loc.

Total Interest is "prime" + X
Prime is the market percent that all banks use. Right now it should be 3%.
X percent is just a number that is different for every client and for the type of credit line. Eg it can be 1.5%.

If i use these numbers for example
Total interest = Prime + X
= 3.0% + 1.5%
Total interest = 4.5%

Prime can change (increase or decrease) depending on the banking market.

Depending on how you set up the line of credit, you could pay interest only automatically every month OR some principal amount + interest if there is a balance on the line of credit. The more principal you pay, the less interest you will be charged.

Reasons for getting a LOC is to buy or pay for things when you don't have money in your pocket right now. People use LOC b/c they offer usually a lower interest rate compared to most credit cards. Eg 4.5% (LOC) vs 19.99% (most visas). Basically it helps you save if your going to carry a balance on the visa. Visa charges you interest when you don't pay the balance due and if you take a cash advance out from the visa.

The LOC is also used as emergency money. Say shit happens and you have to help pay for your parents flight tickets. You can use funds in your LOC. I personally would use this only for extreme cases b/c of the interest charges. Remember, you don't get charged interest if you don't borrow from line of credit.

I know these things b/c I work at bank branch.

All financial advisors/financial reps/account managers (basically everyone working in the offices) have signed agreements stating that they will not sell you any product that you don't need.

^ if you believe those documents are actually binding,LAWL.
There are a lot of honest advisors out there but there are also a lot if cunt fucks. Just go in knowing what you want and don't commit to anything you don't understand or haven't heard before. Also, shop around.

Credit lines are only bad in the wrong hands. If you can't manage your finances then LOC is not for you.

What happens during the application is the advisor looks at your credit history, assets and liabilities with the bank and at other banks, purpose for your application, payroll deposits, and etc

For example, if you have a loan for a car, paying rent, and living on every paycheque, then you won't be likely approved for LOC.
The bank doesn't want to take any losses if you somehow maxed out a credit line and can't pay it back.

You borrow to meet your needs but in a responsible manner.

Thanks for info guys~

interest is calculated on the daily closing balance.

question answered in 8 words ;)

i disagree about the banker lady part. banks dont rly screw you over, ppl screw themselves over. a line of credit is a great way to borrow money, much lower interest than credit cards. just because you get a line of credit for X amount, does not mean you should cash advance all of X. if you are responsible and knowledgeable on financial products, banks are there to help u.

I could tell right from your first post that you could really benefit from gaining some more knowledge about financing in general. Your understanding of interest calculations for loans is completely off too.

To sum up a line of credit:

1. Interest is calculated on your average daily balance (eg the AVERAGE balance you carry for the month). If you owed $2k as an opening balance and paid It off completely at the end of the billing period, you would still have interest calculated on your average balance of $1000.
2. Interest charged as: [(interest rate / 365) x (# of days in billing period)] x average daily balance.


I use my LOC all the time to fund impulse buys like my 3 motorcycles. When I'm bored of them and sell them I pay off the line of credit. Easy!