Line Of Credit – The Simple Monzi Guide

A line of credit can make borrowing easy. Access the cash you need, when you need it, up to a predetermined credit limit. Keen to know more? Read on and Monzi will cover all the information you need to know. Find out if a line of credit is an option for you. Let’s go.

Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.

Line of credit explained

First things first, you’re probably asking what is a line of credit?

In short, a this credit product is an ever-available source of credit that you have constant access to. Whereas a traditional loan is paid in a lump sum, with a credit line you can borrow the exact cash amount you need, when you need it.

When you apply, you’ll be given a credit limit. For instance, it could be $10,000. You can borrow up to this amount but cannot exceed it. As an example, you could borrow $5,000 today and another $3,000 in a month. With this, you’d still be able to access another $2,000 worth of credit.

However, just like with all loans, lines of credit loans must be repaid with interest. Usually, you’ll be required to make a minimum monthly repayment. Although, you are free to repay the balance of your loan at any time.

So, that covers the basics, now we can dig a little deeper. Let’s go.

Home equity line of credit

A home equity credit line Australia is one of the more common forms that a these credit products will take.

In short, you can use your home equity to secure the loan, thereby giving you the credit that you can use to cover any major expenses that you encounter. For instance, you could use it to purchase a new car, renovate your home or, you could even use it to consolidate credit card debts.

The obvious benefit that comes with a these credit products is that you only have to pay interest on the credit that you’ve used, rather than your total credit limit. Moreover, repayments are more flexible than just a standard lump sum loan.

Can I get it online?

While you may be able to get these credit products from a bank or credit union, they’re not your only options. You can potentially access finance online too.

Over the past few years, the digital lending world has expanded rapidly. While in the past you may have only had a few options, now, there are a ton of great lenders who can potentially offer the credit you need.

Best of all, online lending makes things simple. Whereas in the past you may have had to go to the bank for a meeting, the process is now 100% online. You can apply whenever and wherever you like. You might be approved without ever leaving your house. Sounds pretty good, right?

For businesses

While you may be able to get personal credit, they are usually a more common option for businesses. With costs that can be hard to project as well as uncertain cash flows, a line is often a useful credit option for a business.

As a business, lenders calculate your credit limit based on factors including your business age, cash flows, assets, credit history and structure. For small businesses, this limit may be just a few thousand dollars. However, for large businesses this can range into the hundreds of thousands.

What expenses can I cover with a business line of credit?

You get a readily accessible supply of cash for business owners. In short, this credit can cover a vast array of business expenses including:.

  • Payroll
  • Inventory and equipment
  • Accounts payable
  • Bills (e.g. rent)
  • Advertising, marketing and promotional costs

Repayment calculators

A line of credit calculator can make it easy to determine what you might be required to pay. In short, simply enter the details of your credit line (e.g. interest rate and fees) as well as your current outstanding balance. From there, you can get an estimate of your minimum monthly repayments.

These calculators may be offered online for free by a range of lenders and financial institutions and can be a great tool to help you determine if these credit products is the right choice for you. However, keep in mind that any figures presented are non-binding estimates.

Finally, keep in mind that repayments on lines of credit are flexible. While you will must make a minimum monthly payment, there are typically no further limits on the size or frequency of your repayments.

Are personal lines of credit loans hard to get?

Yes, lines of credit are often difficult to access. As a result, you will likely need to prove that you are in a secure financial position and have a reliable history as a borrower.

In saying that, like most loans, lines of credit may be secured or unsecured. Obviously, lenders will be more willing to offer secured lines of credit given that it will be guaranteed. In other words, when you apply, you’ll need to provide an asset as security. Should you fail to make your repayments the lender may take steps to repossess the asset to recover their losses.

On the other hand, it’s usually more difficult to access unsecured lines of credit. These are riskier for lenders as they are simply relying on your making your repayments as required. As a result, lenders may apply higher interest rates or implement more stringent eligibility criteria to account for this risk.

What are the interest rates

With this type of credit product, lenders calculate your interest rate based on a number of factors.

In short, there’s no one size fits all. Lenders will base your rate on the unique features of your application.

As a guide, the more reliable and trustworthy you are as a borrower, the lower your rate will be. After all, you typically won’t be a default risk.

In any case, as a quick guide, lenders will usually consider the following in determine the interest rate you are offered:

  • Secured or unsecured: rates are usually lower on secured loans.
  • Your credit history.
  • Your financial situation.
  • How much are you looking to borrow?

How do I compare credit providers?

The process of comparing lines of credit is the same as comparing any other loans. Ultimately, you want to be able to maximise your borrowing potential while limiting your total costs.

As a guide, the first thing you’ll want to do is construct a budget. That way you can get an idea of how much you need to borrow and what you can afford to repay. This process is easy, simply check out the free online budget planner created by MoneySmart.

From there, you’ll want to compare lines on credit on the interest rates and fees offered by lenders. After all, these will determine your total costs on top of the principal amount that you borrow. As a rule, aim to find the lowest possible rate and fewest fees.

From there, consider the lender and your credit limit. Assess how much you are able to borrow as well as the quality of the lender. Check out their user reviews to ensure they have a history of treating their borrowers fairly.

Line of credit two men pointing into distance at sunset

Is it bad to get a line of credit?

In short, Monzi is unable to say. The suitability of this type of credit product will depend on your financial situation and credit objectives.

As with most credit, whether it is a good idea or not will often come down to how you manage your debt.

If you make your repayments on time and only borrow what you can afford to repay, then this type of credit product can be a handy financial tool that provides you with cash when you need it.

On the flip side, if you overextend yourself, miss repayments or default, then the results may not be ideal. Your credit score will drop, which makes accessing credit in the future more difficult.

As a result, it’s up to you. Don’t agree to a credit contract unless you are sure that it is the right financial decision for you.

What is the difference between a loan and line of credit?

While both are ways that you can borrow money, they are quite different. Ultimately, the key difference lies in the delivery of your cash.

Personal loans come with lump sum payments. If you borrow $10,000, you get that cash in your account once your application is approved. From there, you’ll make repayments over a fixed period of months or years.

By comparison, a credit line is a little more flexible. If you’re approved for a $10,000 line, then you can borrow money whenever you like, as long as your outstanding balance never exceeds this limit. You then must make a monthly repayment towards your outstanding balance. However, there’s no fixed term and your account can remain open for many years.

How long does a credit line last?

Generally speaking, this type of credit product will last as long as you need it. However, it will be up to your lender and the terms that they offer.

In short, “draw periods” are a feature of lines of credit. Draw periods essentially define the period over which you can borrow money up to your credit limit. Typically, this will range from 10 to 20 years, although this can vary based on your lender that you are dealing with.

At the end of your draw period, you’ll need to repay your outstanding balance. This can be a lump sum payment. However, lenders will typically offer a loan to repay this figure over time in a series of manageable repayments.

What happens if I don’t use my credit?

If you don’t use your credit then you have two options. Either you can keep it open in case you need to access cash in the future, or you can close it down.

If you opt to close it down then you will be required to repay the balance of any money that you currently owe on it. So, keep this in mind if you decide to do this.

One thing to keep in mind is that if you have a number of lines of credit open that you want to close, aim to close the newest accounts first. This will ensure that your average age of credit doesn’t drop. This is crucial as a lower age of credit can hurt your credit score.

What is the maximum amount?

Unfortunately, Monzi is unable to say. Your credit limit will be determined by a number of factors and as a result, they will vary. As a guide, it may range from as little as a few thousand dollars all the way into the hundreds of thousands.

Common factors that lenders will consider to determine your credit limit include:

  • Business or personal?
  • Secured or unsecured?
  • Your credit history and creditworthiness.
  • Your financial situation including your current income.
  • Are you applying for a home equity line of credit?

However, this is just a brief outline. Additional factors may be considered in order to calculate your credit limit.

Is it better to get a loan?

In short, it’s your decision. Both options have their benefits meaning you will need to decide what you value or prefer.

If you prefer certainty or think that you will only need to borrow once then a loan will likely be the better choice for you. You’ll get a lump sum payment to cover your immediate costs which is then divided into a series of even repayments over a fixed term.

On the other hand, a credit line could be more suitable if you have on-going, unpredictable expenses. Rather than applying for a loan each time, with this type of credit product you can borrow the cash you need, when you need it. (up to your credit limit). In addition to this, you’ll only have to worry about repaying one outstanding balance.

How do you pay back a line of credit?

Usually, with this type of credit product, you will be required to make a minimum monthly repayment calculated as a percentage of your outstanding balance with interest added too.

However, beyond the minimum repayment, typically there are few limits and restrictions placed on what you can repay. If you have the cash on-hand you are free to make repayments towards your outstanding balance at any time, as often as you like.

Monzi and lines of credit loans

While we’ve explained the basics of a line of credit, unfortunately, we are unable to offer this product. In short, Monzi is a lender-finder service. That means, we may be able to pair you with a lender offering personal loans.

If you apply with Monzi, we can potentially pair you with a lender offering cash loans from $300 to $10,000. Best of all, these loans can be repaid over periods ranging from 12 to 24 months. With quick outcomes and simple applications, a personal loan could be an option for you.

Small personal loan$300 to $2,000Unsecured
Medium personal loan$2,001 to $4,600Secured
Large personal loan$5,000 to $10,000Secured

Keen to apply? Scroll up and use Monzi’s loan slider to begin your application today.

Factor In

Costs

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You won't use a penny to apply for our lender-finding service, but here's some costs you could expect from a lender

Loan amount

$300 - $2,000

Terms

12 months

Costs

20% upfront establishment fee

+ 4% monthly fee

Example

Loan Amount of $1,000 over 6 months repayable weekly (25 weekly repayments). $1,000 (Principal Amount) + $200 (20% Establishment Fee) + $240 (fees based on 4% per month over 25 weeks) = $1,440 total repayable in 25 weekly installments of $57.60.

Under the current legislation, most small personal loan providers don’t charge an annual interest rate (you’ll know this as an APR) %. The maximum you will be charged is a flat 20% Establishment Fee and a flat 4% Monthly Fee. The maximum comparison rate on loans between $300 and $2000 is 199.43%. This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate

Loan amount

$2,001 - $4,600

Terms

13 months

24 months

Costs

48% annual percantage rate

67.41% comparison rate p.a.

Example

Loan Amount of $3,000 over 18 months repayable weekly (78 weekly repayments). $3,000 (Principle Amount) + $400 (Establishment Fee) + $1,379.06 (reducing interest) = $4,779.06 total repayable over 18 months with weekly installments of $61.27.

The Interest Rate for Secured Medium Loans is 48%. The Typical Comparison Rate is 67.41% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.

Loan amount

$5,000 - $10,000

Terms

13 months

24 months

Costs

21.24% annual percantage rate

48% comparison rate p.a.

Example

Loan Amount of $10,000 over 24 months repayable weekly (104 weekly repayments). $10,000 (Principle Amount) + $5,577.12 (Interest) = $15,577.12 total repayable over 24 months with weekly installments of $149.78.

The Interest Rate for Secured Large Amount Loans is 48%. Maximum Comparison Rate is 48% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.