However, what not everybody knows is that overdraft agreements tend to carry high interest rates and though the amount are not significant, if you use it often it may cost you thousands of dollars over the year. Personal Lines of Credit are a much cheaper alternative that must be considered.
The fees charged for overdraft can be considerably high and you should know that there are other options available for getting some ease when you run out of cash by the end of the month. Personal lines of credit can be easily obtained and the interest rates charged for them compared to the overdraft fees are insignificant.
Concept Of Overdraft
An overdraft is the amount by which withdrawals or payments against an account exceed the deposits available in it. An overdraft agreement is the extension of credit by a lending institution that allows such withdrawals without penalty fees. Most overdraft agreements have costs that are usually charged in the form of fees.
Nevertheless, there are certain accounts that include all costs in the same fee. Thus the fee you pay includes maintenance charges, card issuing charges, overdraft charges, etc. Other accounts charge an interest rate over the amount you withdraw exceeding your deposits. These ones usually allow for higher withdrawals, usually up to $2000 or more.
Concept of Line Of Credit
A line of credit is a revolving account with a certain credit limit defined at the time of approval by the lender. Up to this specified limit, the borrower can withdraw as much money as needed. If the limit is surpassed, the account is blocked and no more money can be withdrawn even after repayment unless the lender authorizes further transactions.
Repayment is not fixed either. Though there is a minimum payment usually consistent of interest on the money withdrawn, the borrower can repay the amount he wants at any time. That money becomes available again for him to withdraw if needed. The borrower can withdraw as much money as he wants and as many times as he needs provided he doesn’t exceed the pre-defined limit.
Types Of Lines Of Credit
Lines of credit can be secured or unsecured. Secured lines of credit are usually guaranteed with equity just like mortgage loan or home-equity loans. These lines of credit carry incredibly low interest rates which turns them into an inexpensive and flexible financing tool for those who need credit at non-defined times.
Unsecured lines of credit carry higher interest rates and thus are not the best option. Nevertheless, the rate charged for unsecured lines of credit is lower than the one charged for overdraft agreements in most cases. All lines of credit however, secured or unsecured carry variable interest rates that can change according to market variations.
Lines of credit offer a lot more flexibility than overdraft agreements because the amounts in terms of credit are generally larger. Besides, the interest rate is significantly lower which turns them into a much cheaper alternative for satisfying your cash needs. And though they carry the risk of repossession, among lines of credit, home equity lines of credit are undoubtedly the best choice
