Using a Credit Line for Large Purchases: Strategies and Considerations

Lines of credit can help you finance expensive purchases, be it furnishing your home, an exotic vacation, or surgery. They are flexible loans you can access as per your requirements. It is possible to repay the borrowed line of credit in gradual minimum payments or immediately in a lump sum. These credit lines don’t require collateral, and this feature may look appealing, but that does not mean you should apply for it without forethought. You should look up the credit lines’ late payment fees and interest rates. You should be careful with the borrowed amount despite the numerous lines of credit uses. You could use the credit lines to purchase some groceries, but you need to be careful before using them to buy an expensive TV.

Why Use Credit Lines for an Expensive Purchase?

If you are still considering using a credit line loan to purchase that expensive TV, you must look at the advantages and disadvantages of using a credit line for shopping. A few benefits of using credit lines for expensive purchases are:

● Credit lines charge lower rates of interest on LOC in comparison to traditional loan options like personal loans.

● You can decide the borrowing amount in the line of credit, whereas, in the traditional loan options, the bank already fixes the loan amount you can borrow.

● The bank will charge the interest rate only for the amount used, not the whole credit limit.

● They can help you if you are self-employed. You can borrow a small amount to grow your business.

● Lines of credit provide a high credit limit, unlike the loan amount offered by traditional loan options.

Why Should You Think Twice Before Using Credit Lines for an Expensive Purchase?

Some of the disadvantages associated with using a line of credit for an expensive purchase are:

● Unsecured credit lines have a high-interest rate and require a high credit score.

● The interest rates for credit lines vary from bank to bank most of the time.

● You will be penalised for both late payments and exceeding the credit limit.

● Misusing the funds from a credit line can adversely affect your credit score.

Also Read: Is a Line of Credit worth it? Factors to consider

Strategy to Determine Whether to Use Credit Lines for an Expensive Purchase:

Calculate the time taken to repay your credit line loan without interest charges. Consider this hypothetical scenario. Your fridge broke down, and you found a suitable replacement that costs ₹1,00000, which is way over your budget of ₹85,000. To purchase it, you use a credit card that offers a 12-month interest-free period. To determine where a credit line could help you, divide the cost of the refrigerator by 12, i.e., the interest-free period. You will be required to pay ₹8,333 to repay your credit line amount before the end of the year. Don’t use the line of credit for the purchase if you can’t pay ₹8,333 a month to the bank even if the charged interest rate is low.

Lines of Credits are Useful for What Kind of Large Purchases?

You can use a credit line for large purchases like:

➔ Electronic appliances

➔ Exotic vacations

➔ Renovating home

➔ Purchasing machinery for your business

Qualifying Criteria for Lines of Credit:

You must meet the bank’s standards to qualify for a credit line. For the bank’s approval, you must prove your creditworthiness through qualifying factors like sufficient income and a high credit score. Using credit lines for expensive purchases could be helpful if you can repay on time. You will have a low credit score if you fail to repay the borrowed amount. Also, consider alternative funding options like personal, payday and pawn loans. Before using lines of credit for the purchase, it is prudent to calculate the monthly payments and formulate a repayment plan.