How Do I Choose the Best Credit Facility?

A credit facility is a loan that takes the form of a revolving line of credit. Those thinking of establishing a credit facility must take several factors into consideration such as the interest rate, set up fees and the term time. Lenders offer these facilities to both consumers and businesses. Some facilities are stand-alone products such as credit cards while overdraft facilities and other types of accounts are linked to deposit products and are designed to prevent overdraft situations.

Borrowers can draw on a revolving credit line at any time and these accounts normally have variable interest rates that are attached to indexes such as the United States Prime Rate or the London Interbank Offered Rate (LIBOR). Since rates are subject to change, prospective borrowers should focus on the margin between the index and the interest rate on the credit facility. Additionally, some lenders issue credit lines that have low introductory rates so borrowers should determine the long-term rate margin rather than making a decision based upon the introductory rate. In some instances, the margin changes on an annual basis in which case the borrower may benefit from choosing a credit facility that has a fixed margin for the duration of the loan term.

Some banks charge account set up fees on lines of credit. Borrowers must pay these fees in addition to the government fling fees and documentary taxes that are assessed in many regions. In many instances, borrowers can secure a lower interest rate by agreeing to pay either an account set up fee or an annual account fee. Borrowers calculate the total cost of each credit facility option when choosing between low rate loans with fees and high rate loans with no fees.

In many instances, banks allow borrowers to establish open-ended credit facilities that have no pre-set term time. Other lenders offer credit facilities that are annually renewable. Prior to choosing between a term credit line and an open-ended line of credit, a borrower should carefully review the terms of the entire agreement. In some instances, open-ended credit facility contracts include clauses that enable the lender to terminate the line at any time. Therefore, a borrower should not assume that an open-ended line will remain active any longer than a limited term credit facility.

Credit facilities can be accessed with checks, access cards, online transfers or through in-bank withdrawals. A borrower must review the contract terms to see which access options are available with each credit product. A borrower living close to a bank may have little trouble making in-bank withdrawals while someone in a remote location may need a credit facility that can be accessed online or with an access card.