The Line Of Credit
WARNING: BUILD YOUR RESERVES FIRST! The core of Velocity Banking is an interest-bearing account that remains liquid. A line of credit is one of the greatest tools for this task. We are charged interest on the average daily balance, but we are able to put our money in, and take it back out. It’s a two-way street. Another very important item to mention is that this is other people’s money.
We can leverage this source to make a payment towards a bad loan, or even as a down payment on an investment. It works as a great tool, because you only pay interest on the money you are currently using. To use our line of credit, we are going to put our income into the line of credit as soon as we get it. When we put our income into the line of credit, this counts as a payment. When it comes time to pay the bills, pay them from the line of credit.
We take advantage of the time difference between when we put our money in, and when we take it back out to lower the overall balance and interest paid on the account. As we move our cash flow through the account, when the balance is low enough, we can make another payment.
To understand why chunking is beneficial we first need to understand how an amortized loan works. When we take a loan out from the bank, we have a set term and monthly payment that pays it back. Regardless of how much we owe, the payment remains the same. Additionally, once we make a payment, we cannot take that payment back. The interest is charged on the outstanding balance, and the remainder of the payment is paid to principal.
This results in the first half of the loan being very high in interest while a small dent is put in the principal. Chunking works by using our available balance in our line of credit to make a payment directly to principal on our loan. As we pay off the line of credit, this process is repeated which in turn, drastically decreases the amount of interest paid, and the overall principal balance.
Additionally, as we lower the balance on the loan, the monthly payments on the loan contain more principal. This accelerates the loan even further so that we can quickly and efficiently remove loans that are not favorable.
When we flip a loan, we use our line of credit to make a payment large enough to completely pay off the loan. Its absolutely critical that we have a large enough line of credit to handle the full loan, and we have enough cash flow per month to cover more than our monthly interest cost. If these conditions are met, we can pay off the loan.
This greatly increases our cash flow, as we now have direct access to the principal we are paying in the loan. This is the first large benefit. The second benefit we receive is the ability to take a larger advantage of putting our money to work, and our debt to gross income will drop dramatically. This puts us in a strong financial position.
As we work through the first flip, we continually lower our debt liability (this can help with gaining favor from banks) and we can eventually get access to a line of credit large enough to hold all of our loans. This is the penultimate goal in Velocity Banking and is known as the Flip all technique. Here we recover the most cash flow and are able to reduce the principal faster than ever before.