Understanding Personal Line of Credit!8 min read
A personal line of credit is mostly like a loan but works similarly to a credit card. This is because, with a line of credit, you get a specific loan amount as the limit, from which you can borrow for any purpose as per your need. The limit for which you get approved mostly depends on your eligibility. The money used has to be repaid through EMIs. However, the greatest advantage of having a personal line of credit is you can borrow money any time without going through any paperwork.
What is a personal line of credit?
The personal line of credit is unsecured and the same as any other loan you need a good credit score to qualify for it. It allows you to access money on demand for any personal reasons such as to purchase a gadget, to eliminate last moment cash crunches, home renovation, medical bills, buying something expensive, or even to fund a trip.
You might think that all this can be done with a personal loan too, then why a line of credit?
The answer is simple, for a personal loan you get the loan amount approved and disbursed at once. You start paying interest immediately, regardless of how much money you use. But, with a personal line of credit, you get approved for a particular amount as the upper limit, you are free to borrow any time and as many times as you need (within the provided limit). The interest you pay is only for the money you use. All this makes a personal line of credit a convenient and manageable option for the customers.
*A line of credit gives variable access to funds unlike one-time fund access of a personal loan.
A personal line of credit interest rates
The interest rate for a personal line of credit is lower than the credit card and personal loan interest rates. Where the interest rate of credit card starts with 16% p.a and the interest rate of personal loan starts with 10.5% p.a, the personal loan interest rate starts at 8.0% p.a.
Unsecured vs. secured lines of credit
Till now we have discussed only unsecured personal lines of credit, but apart from this, a secure line of credit is also there. The difference between both of them is – a secured line of credit comes with better terms like a lower interest rate or larger credit limit. But for this, you need to give collateral or security against your credit limit. This is suggested to avail when you don’t have a good CIBIL score and you are not sure about the approval.
Whereas an unsecured personal line of credit might be the better option when you don’t want to risk the ownership of any of your assets by giving them as collateral for your borrowing. An unsecured line of credit is also a good option when the fund requirement is low and you have a good CIBIL score.
When should you get a line of credit?
A personal line of credit is best to have when your requirement is not fixed and you are likely to meet unexpected expenses in the near future.
A personal line of credit is way more convenient than credit cards and personal loans as you need to pay interest only for the amount used from the limit instead of paying interest for the whole amount. Another advantage is you are free to borrow as much you need without any limitations on the end-use of the money borrowed.
- You can use a personal line of credit for- home improvement, to pay for education, to buy gadgets. In short, you can use a personal line of credit to fulfil any of your temporary financial needs. However, you cannot ignore the repayment part and should borrow as long as you know you’ll have the money for repayment.
- Opting for a secured line of credit can even fulfil your short-term business needs as you get access to a bigger amount through a secured line of credit.
- A line of credit can also be used to consolidate your existing debts when you are paying higher interest for them. This will help you to save more on interest.
How does a line of credit work?
After you get approved for a line of credit, you’ll get a limit (maximum amount) within which you can borrow. Along with this, you will also get a time frame known as the draw period, during which you are free to withdraw money from your line of credit account. The lender will provide you with a card to use, or else will transfer the money to your checking account when you’re ready to borrow the money.
Once you use (borrow) money from your line of credit account, interest is charged only for the borrowed amount, and for the repayment, you’ll have to start making at least the minimum payments through EMIs which will include a portion of the principal as well as interest. Once your draw period ends, your repayment period will start, which will have a set time to pay off the entire amount along with the interest.
* making minimum payments will take you a long time to repay the borrowed amount. Secondly, it may also cost you more on the interest.
A line of credit comes with great flexibility, which is indeed the main advantage. You get a certain amount as the limit, within which you can borrow anytime. The repayment amount can also be adjusted as per your affordability and can make the minimum payment. Apply now to avail the benefits.