Line of Credit - Borrowing Against an Asset
Instead of taking a traditional loan and starting to pay interest right away, you can take a Line of Credit (secured against an asset or not), and start to pay the interest only on the amount borrowed.
To create a zero balance loan:
- Create a new loan with zero balance ($0), specify the interest rate, and enter the monthly payment you wish to pay once you start paying off the loan.
- On the Planning page, change the Amount Paid in the debt column to a negative amount for the year(s) that borrowing will occur. The negative amount indicates that proceeds are taken from the line of credit.
- Run the Scenario.
- The loan will start being paid off automatically in any year where there is an amount owing and there is no negative amount entered in the Amount Paid column to indicate borrowing. The payment is determined by the original loan details you provided.
In the following example, we have a loan with an interest rate of 3%, borrowing $5,000 for the first 6 consecutive years, with a monthly payment of $400 once it is started to be paid off. This allowed us to pay off the loan in just over 8 years.
Note: To keep the implementation flexible, there is no credit limit on the loan meaning that your line of credit is virtually unlimited. This may not be an issue if you are borrowing against a large asset (e.g. your home); however, when dealing with smaller LOCs, watch the balance closely so you are not 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Remember that Snap assumes that the money is withdrawn at the beginning of the year (the -$5,000), while the Amount Owing is the balance at the end of the year. The balance owing for the first year ($5,086) is greater than what was withdrawn ($5,000) because interest has been factored in.