Line of Credit - Borrowing Against an Asset
Instead of taking a traditional loan and starting to pay interest immediately, you can take a Line of Credit (secured against an asset or not), and pay the interest only on the amount borrowed.
To create a zero-balance loan:
- Under Scenario Setup -> Debts, create a new loan with a zero balance ($0), specify the interest rate, and enter the monthly payment to be made when the loan will be paid back.
- On the Planning page, enter a negative amount under the Paid column to indicate an amount borrowed instead of an amount paid.
- Run the Scenario.
- The loan will start being paid off automatically in any year there is an amount owing and no amount entered in the Paid column to indicate borrowing. The amount paid is based on the loan specifications under Scenario Setup -> Debts.
In the following example, we have a loan with an interest rate of 5%, borrowing $5,000 for the first 6 consecutive years, with a monthly payment of $400 once borrowing is complete.
Note: The line of credit is unlimited.
There is no credit limit on the loan in the projections. This may not be an issue if you are borrowing against a large asset (for example a Real Asset); however, when dealing with smaller LOCs, watch the balance closely to prevent exceeding the credit limit.
Remember that Snap assumes that the money is withdrawn at the beginning of the year (the -$5,000), while the Amount Owing is the balance at the end of the year. The balance owing for the first year ($5,144) is greater than what was withdrawn ($5,000) because interest has been factored in.
