Dangers and Risks For Line Of Credit Loans
In most cases, your line of credit will be based off a variable interest rate. If market conditions change, leading to larger interest rates, your loan rate will also increase. A large increase can mean a larger monthly payment amount, which in turn for many families can mean a huge strain on the monthly budget.
The loss of collateral can also occur if payments aren't made on time. The most traditional cases of this occurring are foreclosures in the case of home equity lines of credit. Since you are using your home as collateral, it can be seized if payments are missed. Other collateral can also be seized if payments are not meant. Typically, these are non-recourse loans, meaning the bank will only seize your collateral. However, you'll want to check the contract terms, or you could end up losing your collateral and your shirt.
Forgetting to cancel your line of credit, even when your balance is at $0 can lead to annual fees. Not all lines of credit charge an annual fee for the right to use them, but in same cases they do and even if that loan reaches $0 you may be charged an annual fee if you forget to close the credit line.
Some lines of credit will also require that you keep the line open for a certain period of time and make payments as pre-determined, closing the line of credit early could lead to early termination fees that vary from institution to institution.
Finally, there may be other "various charges." Ror example, the lender may charge a higher interest than standard loans, or they may charge a monthly maintenance fee for "managing" your account, while other use fees could be attached, such as a withdrawal charge, payment fees, and other charges.