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Line of Credit

Line of Credit Loan

Last Updated 31st Oct 2020

  • The interest rate offered on a line of credit is lower in comparison to a personal loan or business loan.
  • Line of credit offers the end use of loan amount, wherein the loan amount can be used for any purpose.
  • Further, borrowers can borrow funds up as per their requirement as there are no minimum amount restrictions.
  • The line of credit interest rate is charged only on the utilized amount.
  • Borrowing funds through a line of credit loan involves easy processing and quick loan disbursal.
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Line of Credit Meaning

Line of credit is a form of credit facility helpful for those who need money at regular intervals. A line of credit loan allows borrowers to withdraw a part of the funds from the pre-decided loan amount. In simple words, the borrower withdraws from his loan amount at regular intervals, according to his financial needs. However, what makes a line of credit differ from a traditional loan is the amount of interest charged. The interest charged under the line of credit loan is only on the amount withdrawn by the borrower and not on the total loan amount. A line of credit is a form of 'quick money' available to meet one's urgent financial requirement. Many banks and other lending agencies provide the online line of credit to fund the immediate and urgent needs of the borrowers.

Advantages of a Line of Credit

A line of credit is a go-to option to meet the financial requirements. Some of the advantages are listed as follows:

  • The interest rates charged on a Line of Credit is lower than that of a personal loan.
  • Funds borrowed through Line of credit can be used to consolidate debts, which is to pay off small debts.
  • No minimum amount of withdrawal conditions on credit, thus any small amount can be borrowed. Therefore, credit borrowed imposes less burden.
  • Highly beneficial for self-employed people, as frequent investments can be made with regular small amounts.
  • It comes to aid at times of personal, medical, or professional emergencies.
  • The application process is easier than a personal loan with easier terms.

Uses Of Line of Credit

  • The various uses offered by line of credit are as follows:
  • A line of credit can be used for home renovations and extensions.
  • Line of credit helps one to fund the marriage expenses.
  • In addition to that, a line of credit is highly useful for people with irregular sources of income.
  • Line of credit funds can also be used to consolidate debt.
  • It can be used to fund financial requirements of a business.
  • Lastly, funds borrowed from line of credit are useful in times of medical emergency.

Different Types of Line of Credit

Two kinds of Line of Credit are Secured and Unsecured Lines of Credit.

Secured Line of Credit

A secured line of credit involves collateral or security. The borrower thus needs to keep an asset as a mortgage against the funds taken as credit. In case the borrower fails to pay back, the lender has full authority to sell the asset and recover the loan amount. Further, the terms and conditions associated with a secured line of credit are convincing, with a lower rate of interest, better repaying terms, and more spending limits.

Unsecured Line of Credit

An unsecured line of credit does not involve any collateral or security. Thus, it becomes essential for the borrower to ensure the banks regarding his or her repaying abilities. A good credit score and a secured source of income are things of consideration, in the case of an unsecured line of credit. However, the absence of assets as security usually imposes strict terms on loan borrowed, and thus, the interest rate charged on this line of credit is generally higher.

Personal Line of Credit

The personal line of credit works like a credit card. Just as the credit card limit is set in advance, similarly, in personal line of credit, the loan amount is approved in advance. However, the borrower bears repayments and interest charges only on the amount spent and not on the whole amount. Thus, the repayment structure of a personal line of credit is the same as that of a credit card. A personal line of credit can be used to meet personal expenses like home improvements, vacations, to pay education fees, or to meet medical emergencies.

A personal line of credit is more often than not, unsecured. Thus, the rate of interest charged is high. To opt for a line of credit, borrowers need to ensure a good credit score and a stable source of income.

The personal line of credit is not the same as a personal loan. Both these credit facilities differ in terms of repayment structure and interest rates. A personal line of credit saves the borrower from paying charges on the unused amount. A personal loan, on the other hand, charges interest on the complete loan amount. Also, personal loans are repaid on a fixed time; however, the personal line of credit is paid according to the money withdrawn.

Business Line of Credit

A Business line of credit is a credit option that funds the financial needs of businesses. A Business line of credit prefixes the loan amount, just like any other line of credit, to be borrowed by the borrower. However, instead of withdrawing the funds all at once, withdraws funds according to his or her needs. The regular small withdrawals, according to the financial needs, keep the cash flow maintained in a business.

The Business line of credit is different from a traditional Business loan. While a Business loan is opted for a pre-decided purpose such as to buy large equipment, or to expand, However, a business line of credit can be chosen anytime to meet urgent day to day expenses, either small or big. It need not be pre-planned.

Revolving Line of Credit

The revolving line of credit is a credit facility with a pre-decided loan limit. The amount, however, keeps renewing as and when the amount withdrawn is paid off. As it goes by the name, the borrowing facility is called 'revolving' because, the date of the loan payoff keeps changing, unlike a traditional loan system. However, it is important to keep paying the amount withdrawn and not to exceed the credit limit. This is because regular payoffs and maintenance of the credit limit will allow the borrower to continue with the line of credit without any hindrance up to the allotted time. The best example of a revolving line of credit is a credit card that functions in a similar way mentioned above. However, this line of credit does not necessarily require you to make a purchase, and the funds transferred to the customer's account can be used by him or her for any purpose.

Also, some banks, at times, charge commitment fees from the customers, which ensures the reliability of the borrower. After the customer pays commitment fees to the bank, he or she is allowed to dig funds according to his or her convenience. Both individuals and businesses can opt for a revolving line of credit. It is, indeed, a good way to maintain one's credit score and to meet urgent needs.

How to get Line of Credit

Banks and credit lending agencies all provide the line of credit facility. Application for a line of credit requires visiting the lender and fulfilling the required formalities like submission of documents. These include:

  • Identity proofs
  • Income proofs
  • Address proofs
  • Past six months Bank statements
  • PAN Card

After the submission of the documents, the next step that follows is the documents verification along with the lender checking over the credit score and income stability of the customer. Based on these factors, the lender further decides on the credit amount and the applicable interest rates, and thereby, provides the customer with the line of credit facility. One can apply for a line of credit facility through both offline and online mediums.

For an offline line of creidt application, one is required to visit the bank or NBFC in person, and fill out a hard copy of the line of credit application form. The application form needs to be attested with the self attested copies of the above mentioned documents.

Apart from that, for the online line of credit application, one can log in to the official website of the concerned line of credit lender. Proceed further by filling out the online line of credit application form and upload the scanned copies of the required documents. Though both the application process are suitable and reliable as per the borrower’s needs, yet before applying for a line of credit, it is important that one goes through the terms and conditions associated with the line of credit facility.

Difference Between a Loan and a Line of Credit

  • A line of credit loan is different from a traditional loan. When you borrow a loan, the loan amount is disbursed as a whole, which is in a lump sum. However, in line of credit, the amount is not withdrawn in a lump sum; instead, it is used by the borrower in installments as per his needs.
  • The interest on a loan is calculated on the complete principal amount. In the case of Line of Credit, the interest charged on the line of credit facility is not calculated on the full principal amount, instead only on the amount withdrawn by the borrower.
  • In case of a loan, there are fixed periods designated for repayment of loan amount and EMIs. In a line of credit, there is no fixed pay off schedule. A line of credit is a desirable option when the borrower is unsure about the loan amount. However, when the borrowers wish to withdraw a bigger loan amount for a pre-decided event, then opting for a loan is a better option.

FAQs

What is a line of credit and how does it work?

The meaning of a line of credit is best understood as a financing option that allows borrowers to withdraw funds in intervals than in lump sum. The principal amount is fixed in a line of credit, and the borrower withdraws money as per his needs.

Is it good to have a line of credit?

It is good to have a line of credit when you want immediate funds as per your needs. A line of credit is a good option for people who want to fund their ongoing expenses, rather than a prefixed expense.

What credit score do you need for a line of credit?

A personal line of credit is unsecured; thus, the borrower seeks a good repayment history, ensured through the credit score. A credit score of 700 or above is required to opt for a personal line of credit.

Is a line of credit better than a credit card?

A personal line of credit is a better option when you need cash advances. Further, the credit limit on a line of credit is usually higher than that of a credit card. A line of credit is affordable and controllable when it comes to borrowing funds.

How much interest will I pay on my line of credit?

The interest charged on a line of credit is not calculated on the principal amount, instead only on the amount borrowed out of the principal amount. To calculate your interest on a line of credit, you need to calculate the interest on a daily basis and not on a monthly basis. The annual interest rate is to be divided by 365 and multiplied by a number of days in the billing period.

How much is the minimum payment on a line of credit?

The minimum payment on a line of credit usually varies across lenders. The minimum payments are set monthly, which the borrower needs to pay, irrespective of the amount used.

What is the difference between the Line of Credit and Overdraft?

A line of credit allows one to borrow funds as per his or her needs till a specified credit limit. An overdraft, on the other hand, is an extension to the transaction account, where one can borrow funds, once the credit limit is crossed.

What is the line of credit example?

Examples of a line of credit are credit cards and Home Equity Lines of Credit (HELOC). A credit card allows users to withdraw money according to the user' needs up to a fixed limit. Also, HELOCs function on the 'draw term' period where the borrower can withdraw through cheques or special credit cards.

How can Line of Credit improve life of people in India?

Line of credit can be a blessing in disguise, for low-income groups and people with an unstable source of income. Thus, a line of credit is beneficial in developing countries like India, where several people still struggle to make their ends meet.

How to get the maximum benefits from Line of Credit?

The best tip that can help borrowers make the most out of the line of credit is proper management and planning. A proper consultation with the lending authorities and complete knowledge of all terms and conditions is equally important. In addition to that, maintaining the credit limit and timely payoffs is advisable.

How to select the right bank for a Line of Credit?

To select the right bank for a Line of Credit, it is important to research and investigate well prior to anything. The bank decides on the credit limit and interest charges based on the credit score and salary structure of the customer. The interest rates and clauses may vary according to the bank. Thus, choosing the one that best fits the borrower' requirements and expectations is a required thing to do.

How Can LOC Boost Your Startup Business?

A line of credit is an affordable credit facility than a traditional loan as it is available at low-interest rates. Thus, it can help startups boost their business by assisting them to arrange funds at low costs. Also, the provision to withdraw funds in intervals can help them maintain the cash flow and to meet immediate requirements.


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