Is it better to get a line of credit or a loan when you need cash? The answer mostly depends on how responsible you are and what you want to do with the money. A traditional loan is the best choice if you want to make fixed payments over a set amount of time. If you'd rather have a line of credit that you can use whenever you need to as long as you have money, a line of credit is probably the way to go.
Most of the time, loans work the same way a mortgage does. You borrow a certain amount of money and pay it back over a period of ten to thirty years. When they need to borrow money to start a business or make improvements to their home, many people choose a fixed-rate loan. You can take out one loan from your fixed-rate loan. So, even if you've paid back half of the loan, you can't just call the loan provider and ask to borrow the other half. You use it, you lose it!
A line of credit, on the other hand, is much more flexible and lets you do exactly that. Basically, whatever your maximum line of credit is, that's how much you can borrow by writing a check, and it can be in any amount up to that total. So, if you have a line of credit for $30,000, you can write checks for $1,600, $2,000, $8,000, or more, as long as the total amount you use is less than $30,000. Then, as soon as you start paying back the money you've borrowed from your line of credit, you can use it again. People who don't know how much money they'll need or who know they'll need different amounts at different times often choose a line of credit. A line of credit is a good way to pay for college, buy a new car, or just make sure you always have cash on hand.
A home-equity line is something between a line of credit and a fixed-rate loan. Most home equity lines of credit have a loan period that is split into two parts. The first one is called a "draw" period and lasts about five years. During this time, you can borrow money whenever you need it, just like a line of credit. During the "draw" period, as you make payments, the amount of credit you can use goes up by the amount of your payment. When the draw period of your home-equity line is over, you will either have to pay back the whole balance in one lump sum, or you will have to pay it back over a set period with fixed payments, just like a regular loan. Details about what happens during the "payback" period of your home-equity line will be in your contract. These are things you should know before you sign the papers to get the money.
In some cases, you may be able to deduct some or all of the amount of the loan or line of credit from your taxes. This is in addition to the convenience of having extra money for whatever you need it for. If you are making changes to your home or buying a new one, you can deduct up to $1 million. Basically, if you put your house up as collateral for the loan, the government will help pay for it. If you pay $770 in interest and you can deduct that in the 27% income bracket, the federal government will pay about $200 of that interest. In some states, you can also claim the interest on your state tax returns, which will increase the amount you can deduct.
