Line of Credit: Advantages & Disadvantages - A Comprehensive Guide

A line of credit is a more flexible way to borrow money than a loan. With a line of credit, the lender extends you the privilege of borrowing funds up to a certain amount, but you only repay the principal and interest based on the amount you're accessing at that particular point in time. Flexibility and convenience are primary advantages of a credit line, but impulse spending and unpredictable payments are potential downsides.

Line of Credit Pros

Flexible borrowing - The primary value of a line of credit relative to a loan is that you don't have to commit to borrowing a certain amount of money upfront. This flexibility is especially useful when you don't have a good sense of how much a project or event will cost. It also is beneficial with ongoing projects or activities where payments are spread out over time.

When you borrow with a loan, you repay the entire amount on a predetermined schedule. With a credit line, you not only have more control over expenditures, but you aren't highly-leveraged by debt unless you use up the entire limit.

Convenience - Lines of credit are very convenient to use. Typical lenders provide customers with convenience checks, line-to-checking account transfers and debit card access. You also can set up your line as your overdraft protection, or use your checking account as protection against overdrafts on the line.

Line of Credit Cons

Impulse Spending - As with other forms of revolving credit, an open credit line presents risks of impulse spending. When you perform due diligence on a project ahead of time and get a loan, you know where your money is intended to go. Since the point of a credit line is flexibility, you have more spending uncertainty. Therefore, it is easier to get lured into unplanned and potentially unnecessary expenditures. Discipline is vital, according to Bankrate.

Unpredictable Payments - The lack of certainty on the amount borrowed also means an inability to predict the amount of loan payments. As you borrow, your loan balance increases, and your monthly payments go up. Some types of credit lines require interest-only payments for an initial period of time. While this structure minimizes payments, it also delays paying down the loan balance. Budgeting for your debt obligations is a challenge with such uncertainty.