Despite the push by the banks toward lines of credit, sometimes a loan is actually your best avenue for financing.
The Line of Credit is a form of loan but is actually a revolving charge account.As you put money on the account to pay off the balance, that money is again made available to you as credit.Since it usually has no specific time frame to be paid off the banks are making money on your balance in the form of interest payments every month.This perpetual loan makes more money for the banks because they are counting on it always having a balance owing.For this they usually offer the LOC at slightly lower rates than a regular loan.
Traditional loans differ from the LOC in that they have a negotiated amount of principle, a negotiated interest rate and a maximum time for the loan to be paid off.These loans are made for a specific purpose only; such as the purchase of a new vehicle.However, if the credit is available to you, you can also make this purchase on a line of credit.
One of the major differences between the line of credit and the loan is the collateral used to secure the loan.The line of credit will usually require a pledge of assets in excess of 3 times the value of the line of credit where the loan will only require the purchase assets or equivalent as security against default.Occasionally additional security may be requested but it is largely based on your credit history.For this you pay a higher cost though.
Loans can be open, meaning that that they can be paid off at any time without penalty, or closed, meaning their terms are fixed.The interest rates charged can be fixed meaning it never changes or variable, meaning that it floats with the bank’s prime rate.
Due to the variables involved in writing a loan it is best for the consumer to shop around to get the best rate possible.(A hint here.Get your own credit report before doing this.That way the actual number of inquiries is reduced and doesn’t affect your credit rating.)When making a loan it truly is a free for all.The lender will want to get the most s/he can, and you as the consumer will want the best deal you can get.This is why most banks do not publish loan rates.Each loan is unique and so are the terms.
When taking out the loan, get the best possible terms you can.Never accept what the banker offers as a final offer.That is their opening bid.They want your money and you are still the purchaser; you are paying them to borrow the money.Pay what you can afford and no more.
Negotiate to get the best deal; it will save you money.