So here’s something I’ve been thinking about, and I just want to make sure I understand it right.
With a loan, you have your minimum monthly payment that you need to make, plus interest, until you’re paid up. If you can’t make the payments, then oh shit!
With a revolving line of credit with no time term, you make your minimum payment, but you can borrow that same amount the same month! Thus, you can hold onto the money forever, except that you’re accruing interest of course. Do I have this right?
Now don’t get me wrong, of course one shouldn’t plan on doing this, but it’s more of a consideration of what happens if you fall on hard times for a while, while you’re repaying. If it works like that, it seems like you would have to pay a higher interest for that luxury, but Wells Fargo’s site says that “Lines of credit have variable annual percentage rates that are generally lower than loan rates.” What gives? It just seems too good to be true, in a “something for nothing” sense, and I want to make sure I’m not misunderstanding, and that I’m not opening myself up for a chance to dig myself into a hole in the future.
You’re right about the line of credit being able to pay itself, but banks usually aren’t that stupid. Especially right now the bigger banks are looking out for this kind of crap and will just shut your line off. And that is pretty much negative compounding anyways, which is just painful.
If you really want to swing at this get a credit card with another bank and make all of your purchases on that card. Then use your line of credit to pay off the credit card each month going until you need to. This gives you a 20-50 day period on purchases where you are not paying interest on them. Also it makes it harder to see that you’re pretty much just floating yourself and the bank might have a harder time spotting it.
This is all really stupid to do, however. Credit isn’t free money and it isn’t too good to be true. At best you can float a few bucks for a few weeks if something major happens. I had my transmission blow and I couldn’t pay for it until I got my bonus two month later, but I managed to float it long enough to never pay a dime in finance charges.
If you want to make plans for future emergencies, save money and start making cuts to your spending now. Just think about things like this:
Ten years from now this one trip to Taco Bell will have cost me $90, do I really want to pay that much for a fucking taco?
And loans have higher rates because banks assume the risk that rates will rise. If you’re locked into 5% for ten years, and rates move to 10%, you’re making out quite well so the bank charges a premium when you create the loan. Lines of credit go up and down based on the prime rate, so if rates go up on prime, yours goes right along with it.