What is a letter of credit and how to use it
Great dreams of consumption often demand a different buying strategy. After all, who does not want to own their own property or car, right? The problem is that few can get the money in sight to acquire such goods. And that’s where the question comes in that can help you. Do you know what a letter of credit is?
Between pay at sight and installment of the amount (or a bank loan), there is a consortium. Many companies offer this product that can be the solution for those who do not want to get into debt and do not have the money to close the deal in sight.
What is a letter of credit?
The letter of credit is nothing more than what you get when you are contemplated in a consortium draw. That is, you participate in a consortium of a property or vehicle. In a given month, it is one of those raffled. In this situation, the company that performs the consortium gives you a letter of credit. It acts as a “voucher” for the value chosen in contracting the consortium.
With the letter of credit in hand in the amount determined by the contract, the contemplated person can acquire the property or vehicle of the consortium as in a cash transaction. The difference is that whoever is selling will receive the actual payment from the consortium company.
However, the letter of credit needs to be used in a short period of time. This is because it is subject to readjustments from the vehicle manufacturer’s table, for example. In the case of real estate, it will vary according to the economic indexes related to construction.
There is also the possibility of selling the contemplated letter of credit, although this is not a totally safe practice.
Now you understand what a letter of credit is? It is nothing more than an exclusive document. That is, if you have been contemplated in a vehicle consortium, it should be used in the purchase of a vehicle. In real estate cases, the same thing happens.
+ Meet the consortium of used cars
But after all, what is a consortium?
But what would this consortium system be? It is important to understand how it works to understand about the letter of credit. A consortium is formed by a group of people who decide to buy certain property (house, apartment, vehicle etc). Instead of financing at high interest rates, they prefer to make it as a monthly savings. It will be managed by a company that takes care of making the necessary adjustments to guarantee the purchasing power of the consortium.
Drawings are monthly held between the consortium participants and someone will take your letter of credit home. By the end of the consortium, all participants will receive their letters of credit. All will be contemplated. What defines the order of contemplation can be luck or bid.
For those who do not want to depend on luck, there is the possibility before the raffles offer a bid. It would be an advance of the installments, and the highest monthly bid can be contemplated with the letter of credit. The bid amount will be deducted from the installments and you continue to pay what was left of difference.
+ What is the quota in the consortium?
+ How to plan for a consortium financially?
How can I use a letter of credit?
Now that you already know what a letter of credit is, let us explain how to use this document. If you have a letter in the amount of $ 200,000, for example, and it was granted in a consortium of real estate, the contemplated should look for a property for this amount. Once you have found it, simply provide the seller’s data to the consortium administrator and the amount will be credited.
In the case of vehicles, the consortium must inform the model of the car, its chassis number and year of manufacture. The vehicle credit card must contain all this data. In case of real estate, it is necessary to request the registration in the city hall and proof of discharge of IPTU. This procedure is important for the consortium company to know that it is closing with a safe and reliable business.
There are also other less popular types of consortiums that have been gaining ground. It is now possible to conclude a letter of credit for other purposes. Plastic surgery, renovations, land purchases, wedding parties and travel payments are among the new modalities.
+ How to use the letter of credit when it has a dirty name?
What are the advantages of a letter of credit?
You have already discovered what a letter of credit is and how to use it. Now what are the advantages?
If I do not receive cash, but a letter of credit that limits me to buying certain goods, what is the advantage of this type of investment?
We can consider as one of the advantages the security of not having to deal with money in kind. Without incurring in bank costs, for example.
First, the consortium that originates the letter of credit is a good option for those who are in no hurry to acquire the property or vehicle. Through it, you pay monthly installments appropriate to each one’s budget. There may be contemplation by lot or bid at any time.
When contemplated, the lucky one receives the letter of credit and has the possibility to negotiate with the selling company of the good as if it were buying in sight. It is possible to ask for considerable discounts, request additional or special conditions. Learn more about what is to be contemplated in the consortium.
The use of the letter of credit is different from a conventional transfer transaction. Therefore, it is not necessary to pay fees and taxes that would be applied if you received the money directly into account. In this way, it is possible to guarantee more purchasing power.
Of course, not everything is just an advantage. Let’s see the other side?
Disadvantages of letter of credit
For the anxious on call or for those who need good in the short term, the letter of credit may not be a good deal. It is permeated by uncertainty. You may be the first to be contemplated (and that would be great!). But it may also be the last. If the need is great and your bidding chance is small, think of other alternatives so you do not have to be lucky.
It is the rule to choose very well the company with whom you will hire the consortium. Analyzing your reputation and experience in the field. Care goes hand in hand with luck! Good Business!
Learn more about real estate consortium.
+ How to cancel a consortium
+ How the consortium management fee works
+ Consortium for marriage