We all get strapped for cash from time to time, and we usually solve the monetary crunch with a credit card. However, there’s another increasingly popular option among Singaporeans looking for immediate financial assistance without hampering their credit score – a Line of Credit.
Like credit cards, Lines of Credit (LOCs) are a form of revolving credit which you can keep repaying and reusing in a virtually unending cycle. But how does one choose the right type of LOC?
Learn everything there is to know about LOCs in your very own pocket-sized guide.
What is a LOC?
A line of credit, also known as credit line, is a credit borrowing limit that you can easily access when you require a financial influx. Instead of getting a lump sum, as in the case of personal loans, a LOC enables you to borrow money based on your needs until you reach the borrowing limit. After repayment, you may continue to borrow as long as you keep that LOC open.
Usually, a financial institution such as a bank and a customer agree upon a borrowing limit. Your bank will likely run a scrutinous credit and income assessment on you before setting a borrowing limit for your LOC.
What are the different types of credit lines in Singapore?
LOCs are one of the most sought-after financial products due to their built-in flexibility. This gives borrowers more power over their financial constraints and more confidence in their ability to repay.
Before tapping into a LOC, it is imperative to figure out which type of credit line best suits your personal and financial circumstances. Here are some of the most common types of credit lines to consider:
Personal Line of Credit
With a personal LOC, you can borrow unsecured credit up to your borrowing limit, replenish the funds, and then borrow again. To open a personal LOC, lenders usually require an immaculate credit background with no defaults, a credit score of 670 or more, and a stable income. Some savings or collateral, such as Certificates of Deposit (CDs), could also help you strengthen your case, but they are not a prerequisite to qualify for a LOC.
Best for: Emergencies, overdraft protection, leisure and travel, wedding expenses, regulating household cash flow.
|- Ideal for tenants and non-homeowners since personal LOC does not require collateral security|
- Interest rates on personal LOC are lower than most credit cards
- Swift payout makes it an excellent option for tending to urgent expenses
|- Unsecured personal LOC may have higher interest rates than secured LOC, especially if you don’t have the best credit rating|
- Stricter eligibility criteria limit their accessibility for borrowers with low credit scores
Home Equity Line of Credit (HELOC)
HELOC is a type of secured LOC which you can borrow against the equity of your home. You can easily calculate your home equity by subtracting the amount you owe in your mortgage from the market value of your property.
Lenders usually factor in your home equity to set a reasonable borrowing limit, which is typically about 75-80% of your equity. Borrowers can access available funds, repay them, and borrow again during the HELOC draw period (usually ten years). If you reach the end of your draw period and still owe a balance, you can take out a loan to pay off the HELOC.
Best for: Bridging financial gaps or major expenses incurred from medical procedures, home improvement, or student loans.
|- You may be able to get a HELOC with an average credit score as long as you have decent home equity|
- HELOCs’ Interest rates and APRs are lower than personal LOCs and credit cards’
- HELOCs can help you potentially raise your credit score with consistent and timely repayments
|- Since HELOC is secured against your equity, your home may be at the risk of repossession if you fail to comply with the repayment terms|
- Only homeowners can open a HELOC
- There are closing costs associated with HELOCs, including the appraisal cost of the collateralised property
Business Line of Credit
Running a business comes with challenges, and an unexpected need for funds is one of them. When your fiscal needs are hard to predict, having a financial cushion to fall back on can be reassuring. You can open up a Business Line of Credit to meet the dynamic needs of your business.
Lenders examine your company’s market value, profitability, and risk. Whether the LOC is secured or unsecured depends mainly on your business' funding requirements.
Best for: Inventory restocking expenses, repair costs for equipment, or covering short-term expenses during lean periods.
|- You only pay interest for the amount you use, which is ideal for unpredictable financial needs|
- Business LOCs are significantly cheaper than business credit cards
- A business LOC can help you establish or improve your business' credit history
|- Applying for business LOC requires extensive paperwork and promising potential|
- The borrowing limits for business LOCs may be slightly lower than that of an instalment loan.
How are revolving LOCs different from non-revolving LOCs?
Revolving and non revolving credit lines share the same features and usability, but differ in the following ways:
|Revolving Credit||Non-revolving Credit|
|- Revolving LOC works like an open-end credit account|
- You can borrow money, repay the sum, and then continue to use the credit again, until you reach your borrowing limit
- Ideal for short-term monetary needs such as home repairs
Example: Authorised overdrafts, personal LOC
|- Non-revolving credit accounts have a definitive period of accessibility|
- You can not reuse funds from a non-revolving credit account. Once you pay off the LOC in full, the account will be closed.
- Ideal for mid to long-term financing needs like purchasing equipment, or outlet expansion.
Example: Business LOC
Can a LOC affect my credit score?
LOCs, like any other form of credit, can affect your credit score. See how different factors surrounding your credit behaviour influence your scorecard.
Credit checks or hard credit inquiries have a short-lived impact on your credit score. The lenders assess your credit report to get a holistic view of your finances when you first apply for credit.
A hard inquiry may stay on your report for 24 months but only affects your score for about 12 months. Too many credit checks within a short duration might harm your score. The best practice is to leave a gap of 30-45 days within your applications.
Your repayment history demonstrates how you handle credit. If you pay towards your LOC by the due date, it may actually help you ascend your credit score.
Conversely, late payments could severely hurt your credit score. So, even if you're in the middle of financial turmoil, making minimum payments on time could save your credit score.
Credit utilisation ratio
Credit utilisation ratio is integral to your credit report. The higher your credit card balance, the higher your credit utilisation ratio will be, which results in a low credit score. However, LOCs don't count in your credit utilisation ratio. Thus, opting for a LOC instead of a credit card may benefit you purely from a credit score standpoint.
Credit history constitutes 15% of your FICO credit score. A new credit line could potentially decrease the average age of your open credit accounts.
Credit scoring models consider the average age of open credit accounts, so a new credit line among many open credit accounts could initially hurtle your soaring credit score. However, making timely repayments towards the LOC will yield benefits in the long run.
How to check my LOC status?
You can know more about the status of your credit lines through your credit report. Credit bureaus offer free credit reports that contain a detailed view of all your accounts.
If you encounter a discrepancy in your credit report, you must report it to the credit bureau immediately. Don’t forget to loop in your credit provider to further investigate, and suspend the credit account in case of fraud.
LOC vs credit cards vs personal loans
|Description||Line of Credit||Credit Card||Instalment Loans|
|Type of credit||Revolving||Revolving||Fixed|
|Type of loan||Unsecured and secured||Unsecured||Unsecured and secured|
|Interest rates||Variable: 18.6% to 20.9%||Over 28% p.a.||Fixed: 3.7% to 5%|
|Loan tenure||Open-ended||Open-ended||3 to 7 years|
|Repayment terms||Interest-only||Principal + interest||Principal + interest|
|Early repayment fee||No||No||Yes|
|Processing fee||Recurring annual fee||Recurring annual fee||One time fee at loan origination|
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