Credit line, also known as line of credit is a collective amount of money available to the borrower for use as per his requirements. The lending agency sets a limit as requested by the borrower. He/she can extract any amount up to the maximum limit set by the applicant. The most interesting feature about this kind of loan is that the borrower neither has to use the entire amount at once nor does he/she have to pay interest for the entire amount. The amount used by the borrower is only subject to interest. This loan is quite suitable for those who are not sure about their financial requirement but are in need now and then.
It is a flexible loan that can be utilised when there is a sudden and an urgent need for finances, however, the amount needed is not fixed.
Special Features of Credit line
Borrow when you need: It is a convenient option because you can withdraw the amount whenever you need. It doesn’t have to be withdrawn immediately after you get an approval.
Borrow how much you need: You can withdraw the amount you need. It cannot go beyond the limit but within that limit, you can withdraw multiple times depending on your need.
Draw and repayment duration: In most of the credit line loan offers, you are done away with minimum payments once you start borrowing. You also have an option of repaying in your draw period which is its unique feature. However, some credit lines do not follow this, you have to first repay the due amount and then start borrowing again.
Types of Credit line
Credit card: It is the most common type of credit line that is used by most of the population. It has an amount limit that can be used and pay it back before the due date along with the interest. The interest is charged on the amount used.
Home equity line of credit: It is the loan against your home value. You can use cash amount up to 80% of your home value.
Business line of credit: It is a loan given to a small business group who do not know the exact requirements or business needs, therefore, they cannot estimate the amount they would be needing. It makes borrowing flexible hence fulfilling the customer requirements. It is different from standard business loans as the amounts, EMIs and tenure of the loan all are fixed, here everything is flexible and can be utilised as per the requirement.
How is Credit line different from Personal loans?
Some of the general yet major differences between credit line and personal loan have been stated below.
Credit line doesn’t have a fixed EMI whereas personal loans have a fixed monthly EMI.
Credit line sets an amount as the maximum limit within which a borrower can withdraw the amount he needs whereas personal loan amount is credited at once in the account of the borrower to be used by the borrower. It simply means in case of credit line you can borrow multiple times whereas in case of personal loans you can borrow once. You need to apply for a new loan if you want to borrow again in a personal loan.
The interest charges on credit line loan begin when a certain amount is borrowed or withdrawn whereas in case of a personal loan the interest charges begin once the amount is credited. Even if the borrower doesn’t use the amount however interest is levied on him/her.
In case of credit line loans, the interest is charged only on the amount utilised by the borrower and not on the maximum amount limit however in case of personal loans, the interest is charged on the entire amount.
Credit lines allow for repeated repayments and withdrawal side by side with no defined time, however, a personal loan has everything decided in advance; when the loan amount has to be paid, what will be interest charged and how much amount will be paid.
Credit line loans are usually offered on higher interest rates as compared to personal loans.
Credit Card or Credit line or Personal loan
Looking into your requirements, you must make a decision on which one to choose. If you are financial requirements are not much and it just for a short span, it is preferable to use a credit card and repay the entire amount at one go to avoid heavy interest charges and get free from debt.
Personal loans mean bound expenses that become mandatory and also stretches for the entire tenure decided at the time of application. There is pre-payment policy but you need to pay extra for that as well.
Considering both the scenarios, it seems the friendliest option is that of taking a line of credit as it is flexible, can be adjusted as per the needs of the borrower. However, if you have an estimate of the duration and it is longer then personal loans are preferable as they have lower interest rates when compared to credit line.
Credit line: Pay attention
We have been talking about the benefits and features of the credit line loan, however, there is a drawback to this type of loan that is its uncertainty. The loan can be withdrawn anytime from the bank basis any sense of doubt or false interpretation. While signing the agreement pay attention to any such clause that states that the lender can demand repayment of the entire amount at any point of time or can even reduce the limit.
Check out the processing fee since it is not charged only on the borrowed amount but on entire amount that has been set as the limit of the loan.
Interest rates of credit line loans and personal loans are lower as compared to credit cards. Choose wisely!
Loans may be a respite at the time of need but surely bother if they are unwanted. Hence, no one should bear this unwanted expense of monthly EMIs if you do not require it. Our effort should be to build our expenses on the real cash we have in our accounts and avoid using borrowed money since it is not your own you have to give it back someday to its owner. Even if you borrow money out of need, try to return it at the earliest and plan your needs for what your pocket allows. You have one life to live, don’t live in debt.