If you are thinking about buying something like a new car, a new recreational vehicle or a computer, it can be tempting to put it on your existing line of credit. However, in many cases it would be better to get a term loan rather than use that line. Here are a couple of reasons for that.
A car or computer has a certain useful life and when that life is over and it is time to buy a new one, you will be sad if you have not paid for the old one yet. You want to have car left over when the loan is paid, not loan left over when the car is no longer any good. If you borrow the money on a line of credit there is usually no required monthly payment beyond paying the interest. Few of us would be disciplined enough to figure out how long the car will last and divide the loan by that number of months, and make the payment on the line of credit each and every month.
If you went for the term loan however, you will be required to make the monthly payment. In fact, the payment will disappear out of your bank account, so there is a better chance that the loan will be paid before the car is used up. Another advantage of the term loan is that the bank cannot call that loan unless you miss a payment, whereas a line of credit has to be renewed sometimes annually and you could lose that line.
Next time you are thinking about putting something on your line of credit, think about the monthly payment you should be making to pay that loan off.
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