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Line of Credit and How It Works

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A line of credit is a flexible way to borrow money when you don’t need it all at once. It’s different from a loan – you can borrow, repay, and borrow again, like a financial safety net. Here’s how it works and when it makes sense.

✅ 5 Key Facts About Lines of Credit:

  1. You get approved for a maximum amount, but only pay interest on what you actually use.
  2. It’s reusable — repay what you used, and the money becomes available again.
  3. Interest rates are often lower than credit cards, but higher than personal loans.
  4. It’s great for irregular expenses — home repairs, business costs, or school fees.
  5. You need good credit to qualify, and repayment discipline is key.

👉 A line of credit gives you borrowing power on standby — just don’t treat it like free money.

Are You Eligible for a Loan?

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Before you apply for a loan, make sure you meet the basic requirements. Lenders use specific criteria to decide if you’re a reliable borrower. Knowing where you stand helps you avoid rejections — and protects your credit record.

Here’s what to check before applying:

  • Verify your income. Lenders want stable, verifiable income. Be ready to show payslips, bank statements, or business earnings. If your income is irregular, average it over the last 3–6 months.
  • Know your debt-to-income ratio (DTI). Total monthly debt payments should ideally be under 40% of your income. If you’re already repaying multiple loans, your chances drop.
  • Check your credit score. Even a short credit history helps. Scores above 600 are usually acceptable; over 700 is strong. Pay past loans and bills on time to build your profile.
  • Avoid too many recent loan applications. Every loan application may trigger a credit check. Too many in a short time signal desperation and can lower your score.
  • Use pre-eligibility tools. Many lenders offer free online loan checks with no impact on your credit. Use these tools to see your chances before applying officially.
  • Match the loan to your profile. Don’t apply for ₦2M if your monthly income is ₦50,000. Choose offers aligned with your earnings and repayment ability.
  • Check basic age and ID requirements. Most lenders require you to be at least 18–21 years old, with valid ID and a functioning bank account.

Loan eligibility isn’t guesswork — it’s measurable. Check these points first, and you’ll increase your chances of approval without harming your credit.

Avoid Common Loan Mistakes

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Loans can help you solve real problems — but only if used wisely. Rushing into the wrong loan can damage your finances for years. Here’s how to avoid the most common mistakes.

  • Never borrow more than you need. Extra money may feel good now, but you’ll pay interest on every naira. Borrow only what you can repay comfortably.
  • Avoid payday loans and quick-cash lenders. These loans often come with extremely high interest rates (up to 50%+ per month). They may look easy but trap you in debt cycles.
  • Check for hidden fees. Processing fees, early repayment penalties, account maintenance charges — even small percentages add up. Read all terms before signing.
  • Understand the interest type. Is it flat, reducing balance, or compound? A 24% flat rate is very different from 24% reducing balance. Ask for the full repayment schedule.
  • Don’t ignore the repayment timeline. A short-term loan with big monthly payments can crush your budget. Make sure the loan duration fits your cash flow.
  • Avoid applying for multiple loans at once. It lowers your credit score and shows lenders you may be struggling. Apply only after you’re sure of your choice.
  • Ask questions. If anything is unclear — fees, rates, conditions — ask. Don’t sign what you don’t fully understand.

👉 A good loan helps you build. A bad loan creates stress. Be informed, stay alert, and borrow smart — your future self will thank you.

How to Compare Loan Offers and Pick the Best One

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  • Look at the APR (Annual Percentage Rate) — it includes both interest and fees.
  • Check the loan term — shorter terms mean higher payments but less interest overall.
  • Consider repayment flexibility — can you pay early without a fee?
  • Always ask for the total cost — not just the monthly payment.

👉 The best loan isn’t always the cheapest monthly payment — it’s the best total deal.

How to Choose the Right Loan for Your Needs

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  • Understand the purpose: home, car, personal expenses? Different loans fit different needs.
  • Check the interest rate type — fixed or variable. Fixed gives stability, variable may be cheaper but risky.
  • Look for hidden fees: processing charges, early repayment penalties, late fees.
  • Compare lenders, not just banks — credit unions and online lenders often have better rates.

👉 The right loan is not just the biggest amount — it’s the best fit for your goals.