Line Of Credit

Most people often seek traditional loans from banks, use credit cards or borrow from friends or family when in need of money. In recent times, specialized peer-to-peer or social lending sites have become popular spaces for lending on the web. In the direst of circumstances there are pawnshops and payday lenders that borrowers can go to.

However, the best and probably the wisest choice would be to take a line of credit from a bank or NBFC. A personal line of credit, like credit cards, is a revolving credit account that allows individuals to borrow money to a preset limit. These funds can be used for any purpose you see fit. While lines of credit do not allow withdrawing of money at one go, they come at a lower interest than personal loans and credit cards. 

If you’ve been searching for ‘line of credit meaning’, then this article is for you. Let us now understand in detail about the line of credit and how it works.

What Is a Line of Credit

A line of credit is a flexible loan provided by a bank or financial institution. Similar to a credit card, which allows you to access the funds on your account as needed and then repay them, the terms of a line of credit are generally defined by your institution, but you can choose how much money you want to borrow, when you want to use it, and how long it will take you to repay it.

A line of credit offers flexibility by providing a borrower with the ability to borrow money as needed and only pay interest and fees on the amount borrowed.

When Is a Line of Credit Beneficial?

Due to the flexible nature of lines of credit and the fact that they are typically not used for one-time purchases such as houses or cars, lines of credit can be helpful for acquiring items for which a bank might not normally underwrite a loan.

Typically, lines of credit are used to smooth out fluctuations in income and expenses or to finance projects where it is hard to predict exactly the amount needed.

Types of Lines of Credit

A line of credit can be categorized into two types: secured and unsecured lines of credit. 

Secured Line of Credit: A secured line of credit is backed by collateral, such as a vehicle, a home or another asset, and typically carries a much lower interest rate than an unsecured line of credit. In case you fail to repay the borrowed amount, the lender can liquidate your assets to cover the losses. 

Unsecured Line of Credit: An unsecured line of credit is not backed by collateral and carries a higher interest rate to account for the greater risk associated with lending to someone who does not have substantial assets to protect against default. The lender extends this based on your eligibility and the policy they follow. 

Unsecured Line of Credit is further divided into:

Personal Line of Credit: This facility is generally employed by customers for urgent requirements or to fund big purchases, home renovation, education and other financial requirements.

Business Line of Credit: This is commonly availed by businesses to meet their expenses for working capital requirements, paying wages, inventory and more.

Pros of Lines of Credit

A line of credit charges interest only on the amount used by the consumer, not on the entire amount available to the consumer

As long as interest and fees are charged, consumers can repay the line of credit principal at their convenience. Consumers can generally redraw within their limit multiple times without additional fees

A line of credit can be approved once and used for a long period of time, usually three years. In addition, it contributes to boosting your credit score

Cons of using Line of Credit:

It may be unnecessary to pay maintenance fees or annual fees if you rarely use the service.

Although a line of credit may appear more expensive than a personal loan at times due to its interest rate flexibility, the actual cost to the consumer may be less

There are not many financial institutions that offer lines of credit, so a consumer may have difficulty understanding the product.

Borrowing is always a serious matter and the obligation to repay must be taken seriously. Therefore, given the fact that loans are easily available via a line of credit, it might lead to unnecessary expenses and interest cost if not used wisely.

Conclusion

A line of credit is a loan that allows a borrower to draw upon the availability of funds from another source. It can be used for a variety of purposes, such as long-term borrowing or executing a complicated transaction like a wedding or home remodeling. 

While excessive borrowing against a line of credit can get somebody into financial trouble just as surely as spending with credit cards, it can also be used responsibly to solve short-term financial problems or facilitate complicated transactions. 

Lines of credit are just like any other financial product. They can be good or bad depending on how people use them.

Line of Credit Related FAQs

Ans: Lines of credit are loans that let you borrow money up to a specified limit. The funds do not have to be used for a particular purpose and you can spend as little or as much of the funds as you want, up to a certain limit. You can pay back your debts at any time.

Ans: For large planned expenses, opening a personal line of credit can be a good way to secure flexible access to funds. The primary purpose of this type of financial product is to allow you access to a set amount of money over a fixed period of time.

Ans: If you do not have good personal credit, you may have a more difficult time qualifying for a line of credit. Furthermore, while lines of credit are frequently less expensive than credit cards, you may be eligible for a personal loan.

Ans: If you seldom use your available credit but only use a small portion of the amount available, your credit utilization rate will be lower and your credit scores will improve. Your utilization rate is the percentage of available credit that you are using at any given time.

Ans: A personal LOC typically requires a credit history with no defaults, a credit score of 670 or higher, and consistent income.

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