Establish a payoff strategy for your line of credit
Having a line of credit can be very beneficial and having a calculator can help to assess payments on a new or existing credit line easily. By adding the account balance and interest rate, as well as a few other minor details, you can find out how long it would take for you to pay back the line of credit. You could even factor in upcoming draws and variable rate changes so that you may establish an effective payoff strategy. On this page, you can learn about what a line of credit could be most useful for.
What is a line of credit?
A line of credit (LOC) is a flexible, low-interest type of loan that is offered by banks and financial institutions to individuals or businesses. The loan amounts can range from $5,000 up to $500,000 depending on the applicant’s credit score, income, current debt ratio, and any property leverage. Smaller lines of credit are typically unsecured and are qualified mostly on credit score, while larger lines of credit are secured and leveraged against real estate. The latter is referred to as a home equity line of credit (HELOC).
A line of credit is similar to a credit card in that you may access a limited amount of funds as needed, which can then be repaid immediately or over a period of time without the high annual percentage rate. Once you have negotiated the line of credit limit, you may go up to that limit as often as you want or need, as long as you are staying within the terms of the loan repayment.
Interest rates may be fixed or variable and are calculated as money is withdrawn from the line, as opposed to a fixed percentage of the total loan amount. Minimum monthly payments may be a combination of interest and principal or interest only. These factors make it difficult to understand how much you may owe, and how long it may take to pay off the loan, so using a payoff calculator can help you make accurate assessments quickly.
Using this calculator, you may find out if a line of credit is right for you and establish the best payoff strategy for existing credit lines. Please continue reading for more information on the usage of credit lines and how to use the line of credit payoff calculator.
What can a line of credit be used for?
A line of credit is an attractive tool for many individuals in different situations due to the low-interest rate and flexibility, but they are not intended for large one-time purchases like a home or car. Instead, credit lines are best used for business transactions, home improvements, investments, and debt consolidation as follows:
• Business owners can use credit lines to smooth out uneven cash flow, or the irregularity of seasonal income, or finance projects where there is a delay between completing work and receiving pay. While other self-employed individuals may require funds to cover tax payments if there is a discrepancy between the accounting profits and the receipt of cash.
• Homeowners often find benefit in a home equity line of credit for home improvements or to complete renovations. The value of a home is directly proportionate to the work and furnishing done on the home, therefore full a return of the investment can be expected and the line of credit paid off when the home is sold or rented out.
• For seasoned investors, a line of credit can be a great benefit to pursue investments with a rate of return that is higher than the interest rate on the LOC. Such investments can be into real estate, real estate investment trusts (REITs), company stocks, or into private investment firms for a high rate of return. However, investments with high returns tend to be more volatile and may result in total loss of principle in some cases.
• Finally, it is common for individuals to use a line of credit for means of debt consolidation. Paying off high APR credit cards and high-interest loans with a line of credit can reduce monthly interest charges, and may allow you to have better control of your finances and roll down your debt more efficiently.
The line of credit calculator is well adapted to calculate payoff obligations in any of these scenarios and may be an excellent tool to assess if a line of credit is right for you. It is also adapted to factor in up to four future draws from the credit line, to highlight the most useful payoff strategy.
Line of credit disadvantages
Even though a line of credit can be a great flexible tool for business or investments, it too has its disadvantages. Most credit lines have variable rates which means payments can change monthly and the constant access to funds could create further stress through poor financial choices.
For those who have difficulty with credit, it may be all too easy to cave into temptation and max out credit cards shortly after consolidating debt. With a line of credit, you may spend the money however you see fit, unlike other loans where the funds are determined for a particular use. The money is always easy to spend, but much harder to pay back. Therefore, accepting a line of credit requires a high level of responsibility and a good payoff plan.
Kindly remember to save the line of credit payoff calculator to your bookmarks or home screen, and use the share feature to help others decide if a line of credit is right for them.
How to use the calculator
The line of credit payoff calculator is very simple to use and only requires the information concerning your new or existing line of credit to provide an accurate report. The LOC calculator is comprised of two parts: an information intake and integrated results. Within the information, intake is two subsections pertaining to your line of credit information and future draws from the line.
Line of credit information and future draws from line
Step 1: Identify the current balance on the line of credit, on the first line of the calculator.
Step 2: You should include the interest rate, or APR on the loan- whichever is higher, on the second line of the calculator.
Step 3: If your line of credit is using a variable interest rate, please identify the expected annual rate changes on the third line of the calculator. If your interest rate is fixed, you may leave this field at a value of zero.
Step 4: Set up a payoff goal in months on the fourth line of the calculator. This is the number of months you would like to have this line of credit entirely paid off.
Step 5: Add your current monthly payment to the fifth line of the calculator. You may either enter the minimum monthly payment, or the maximum amount you are prepared to pay each month here.
Step 6: New recurring monthly charges can be added to the sixth line of the calculator, along with any annual fees associated with the line of credit on the seventh line.
Step 7: If you are planning to make any future draws from the line of credit click on the title “Future draws from line” to expand the next section. Otherwise, you may proceed to view your integrated results.
(Optional) Step 8: Simply identify the dollar amount of the future draw on the first line in the future draws subsection, followed by how many months from now the draw will take place on the second line- repeating this as necessary from lines three to eight.
Step 9: Please proceed to view your line of credit payoff results.
Once this information is added to the line of credit payoff calculator you may view your results in the form of information prompts, graphs, and detailed tables to assist in your understanding.
Directly below the data inputs, you may see a prompt notifying you of how long it will take to payoff your line of credit using your current monthly payment, and a chart highlighting the credit balance by month. You may view your payment strategy on the blue line, and the required monthly payment to reach your goal in green. You may hold your mouse over any part of the line graph to get an accurate reading of the month, current balance, and current payment. While the next tab over reviews alternative payoff scenarios.
The ‘more payoff scenarios’ tab provides a bar graph comparison of how different monthly payments may help you to reach different payoff goals. Here you may assess a separate monthly payment within your means to become debt free even sooner or view the next tab over to see a detailed summary of your current monthly payment for LOC payoff.
By viewing your payment schedule, you may see a complete overview of your current monthly payment throughout the credit line payoff to decide whether this type of loan or payoff strategy is right for you.