Line of Credit – How it works
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How a Line of Credit (LOC) works.
A Line of Credit is the preferred financial platform for fast debt reduction. In fact the best option for your home loan is to split it into 2 sections, a Line of Credit, and a Term Loan, both interest only. By setting up a Line of Credit, it allows you to have a smaller chunk of the loan to concentrate on paying off first, therefore you will see a bigger result more quickly which will keep you focused and motivated to do more.
Here’s how to do it. You bank you income (salary) straight into your Line of Credit. This way your income is sitting on your loan reducing the principal and you are paying less interest. You do all your spending on your credit card and you pay out the credit card
in full on the due date (from the Line of Credit) so you are paying no interest on your purchases.
So let’s meet Bill. Bill earns a $1,000 a week. He borrows $100,000 and his repayments are a $1,000 a month. He banks his pay in to his home loan. So, week one, he reduces his home loan to $99,000, $98,000, $97,000, $96,000 etc. He’s still spending money but he’s actually spending it on a credit card but what it’s doing is the credit card is going to be paid out in full on the due date so no interest is going to be charged on the credit card, but his loan is being charged interest on a daily balance, so he’s actually going to pay less interest to the bank on his home loan. By keeping his repayments the same, all of the saving actually expedites his reduction of debt.Source: thinkmoneyfinance.com.au