Lines of credit are loans that allow you to borrow funds up to a fixed limit. They are very similar to credit cards and can be paid back at any given time and interest is only paid on the money you borrow. People use lines of credit for many reasons, such as home improvements or to fund business expenses.
However, the repayment schedule can often be hard to stay on top of if you’re only able to make the minimum monthly payments. This is because they are usually equal to the monthly interest charges.
As with most loans, it’s not just the interest rates that can make people feel unable to pay back their credit lines. One of the main benefits of a line of credit is its flexibility. You don’t need a specific reason to borrow money and while this is good to cover any unexpected expenses but it can also lead to impulse spending.
Many people who turn to lines of credit quickly find themselves borrowing the maximum amount available to them, increasing monthly payments spiking to the point where it becomes no longer feasible to pay back.
Most people will opt to just make their minimum payments each month because it is the cheapest option of paying it back. However, as withdrawals and repayments are on an unscheduled basis people are often shocked at the level of interest that they pay back because interest is gathered from the moment any money is borrowed and interest calculations are often complicated.
The lenders also preserve the right to spike the interest levels at any given time, meaning many can end up paying back almost double what they borrowed.