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Cash credit is typically a line of credit that a business or individual has access to when and if they need it. As is the case with any financial product, there are pros and cons of using this type of credit, including ease of access, having it as a backup plan, the interest rate and using the money for the wrong reasons.
One of the primary pros of cash credit is how easy it is to access the money when it is needed. It is especially advantageous when the money is needed only for a short term cash loan. The cash credit line is easy to access, so there is not a need to apply for a new loan or worry about how to come up with the cash to pay for an unexpected expense.
Another pro to obtaining this type of credit is that there usually are not any upfront costs to establishing the credit account. Upfront costs may not be necessary if the business owner puts up a piece of property up as collateral for the loan, such as a home or a car. Without collateral to obtain the cash credit line, there may be upfront costs or a higher interest rate.
One of the primary cons of cash credit is the interest rate. The interest rates on these types of accounts are typically higher than secured lines of credit. In some cases, especially if the loan does not have any collateral associated with it, the cash credit loans can have interest rates in the double digits.
Another disadvantage of cash credit loans is that they are typically short term loans. This means that the payback period is short, typically less than five years. Because the payment period to pay back the loan is short, the monthly payments are also higher than those of long term loans or lines of credit.
Cash credit loans also tend to have adjustable rates rather than fixed rates. This means that the payments to repay the loan may start out low, but if the interest rate increases, then so do the monthly payments. In addition, some cash credit accounts have prepayment penalties. This means that if the cash credit account is paid off before the term of the loan is complete, then the borrower must pay a percentage of the loan amount as a penalty fee.