Chap 7: Lines of Credit

Not too many years ago, a properly trained and capable lending officer, often known in the community, and established in the branch, would actually become involved in the application for a loan. They would consult and interview, take a credit application, review the reason for the loan and even offer a little financial advice or insight.

Lines of credit are very convenient and give total control over their use. They are also very flexible in the pay back requirements – for better or worse. As long as the minimum payments are made, any additional funds go straight to the principal. The consumer has become the loan officer that decides each month how much to pay and how quickly to pay it off. Their biggest drawback is the discipline required to re-pay the balance…

…A line of credit will never match the logical term of a loan. To stress this again, it is easy to fall into the trap of using a line of credit for longer-term debt than it should be…

Another frequently heard story and horrible example is a loan taken for a long awaited, probably well-earned vacation. A personal loan should, logically, be set up over 12 monthly payments. The same amount drawn on a line of credit is still a debt, but now nobody is assuring this is paid off before the next vacation arrives. Since there is no requirement for a specific payback, only the three percent minimum (or interest only if fully secured) has to be made. On $1,000 at seven percent, the vacation will actually take seven years to pay.