Is a contingency line of credit right for your community association?

Contingency lines of credit can help a community association stay financially stable and handle unexpected expenses. They can protect homeowners from a special assessment or rise in dues. Use this guide to determine the right HOA loan for your community association.

What is a contingency line of credit?

A contingency line of credit is a pre-approved amount of money a community association can borrow from a lender. A community association draws funds from this line of credit only when necessary, as it must pay interest on the withdrawn amount. This type of credit offers flexible terms and acts as a safety net for unexpected costs, but it may also include annual fees and charges for each withdrawal. 

How does a contingency line of credit work?

Community associations must individually apply for a contingency line of credit and follow the lender’s terms. Once a lender, like Popular Association Banking, approves the application, the community association can borrow money up to the agreed limit. After the borrowed amount is repaid, the available limit resets like a standard line of credit. A community association can use a contingency line of credit for multiple purposes, including emergency repairs, legal fees, or short-term cash flow interruptions..

The pros and cons of a contingency line of credit.

Like many other financial products, contingency lines of credit have much to consider. The following summarizes the essentials to help community associations make a more informed decision.

Advantages

• Flexible and immediate access to funds 

• Borrow only what’s needed, so you don’t pay interest on unused funds

• Helps avoid special assessments or increased dues 

• Offers members more financial peace of mind

• Repayment over time lowers upfront costs 

• Can help the community association build credit history

• Enables community associations to take on projects that would otherwise be too expensive

Disadvantages

• May include annual fees, transaction fees, and penalties 

• Variable interest rates can make it harder to predict total borrowing costs 

• Mismanagement can lead to excess borrowing costs 

• Requires ongoing management by community association board members 

Bank loans vs. contingency lines of credit.

In contrast to contingency lines of credit, bank loans come in a lump-sum amount and are typically tied to a specific project. Repayment terms are often set in advance, making them better suited to predictable expenses.. 

By comparison, contingency lines of credit allow a community association to withdraw only the amount it needs, up to the approved limit. This option offers more flexibility but tends to come with a variable interest rate. However, interest is only charged on the borrowed amount, not the full balance.

How to qualify for a contingency line of credit.

To decide if this option fits their needs, a community association’s board members should start by reviewing the advantages and disadvantages of contingency lines of credit. When comparing lenders, the board should consider more than just the credit line itself, including the lender’s terms, customer service ratings, and any extra benefits. It is helpful to create a shortlist of lenders before applying.

When applying for a contingency line of credit, board members should carefully review the eligibility and documentation requirements. In most cases, the lender will review the community association’s financial statements, budget history, member dues collection records, reserve fund balances, and creditworthiness. Whether the application is approved or denied, the community association should keep homeowners informed. 

How to use a community association loan wisely.

A thoughtful approach can help a community association get the most value from a contingency line of credit. First, determine why the community association needs the line of credit, how it’s likely to be used, and what goals it can help accomplish. 

In addition, it’s important to understand the lender’s terms and conditions to avoid unnecessary interest charges. Each time the community association wants to use the line of credit, the board members should follow a clear repayment plan. 

Explore the tools your community needs to thrive.

A contingency line of credit can show that a community association is strong financially and prepared for unexpected costs without burdening homeowners. When used strategically, contingency lines of credit can help cover delinquent dues, unforeseen costs, and rising costs due to inflation. Speak to a Popular Association Banking Relationship Manager to determine if a contingency loan can help your community association achieve financial security.