There are situations where you don’t know how much money you will need or it is even possible that you are in a phase of life where financial crunches have become a part of your life. All this forces people to get some quick money to deal with the situation. For these situations, loans are not that appropriate as you get a lump sum amount with it for which you need to pay interest. However, as compared to loans personal line of credit is more appropriate to treat regular financial crunches. Many financial institutions provide this facility which helps one to meet the immediate needs of people who are in financial trouble. 

A line of credit offers the consumers flexibility on how much to borrow and how and when to repay.

Advantages with Line of Credit

One of the biggest advantages which comes with a personal line of credit is- once the borrowed amount is paid back, it can be borrowed again and this can continue. 

Since the consumers only pay for what they use, it can turn out to be cheaper from loans.

It offers great flexibility to the consumer.

Personal Loan Vs Personal Line of Credit

Personal loans allow people to borrow a lump sum amount of money and repay it over a fixed repayment plan. The interest is charged on the total amount you borrow and repayment for which starts in the form of monthly instalments. For the repayment, borrowers have to pay interest on the full amount irrespective of when, where and the amount of money used.

Whereas a line of credit could be ideal for borrowers who need to have regular access to funds. The line of credit provides great flexibility to use funds when the need arises without having to apply for multiple loans.

More importantly- for a personal line of credit interest is charged only on the amount one has used, instead of the approved amount. 

A personal line of credit is best suited to those who face frequent short-term cash flow mismatches and also have adequate money to repay the borrowed amount in a short time.

Few things which one should know about a personal line of credit

Interest Charged: The interest charged on a personal line of credit varies from lender to lender. But one good thing about it is- the interest is charged only the amount you use instead of the maximum amount allotted. 

Credit Limit: This is the total amount/ maximum limit allotted. One is free to borrow within this limit as per the requirement. However, this limit depends on the eligibility and profile of the borrower. 

Purpose: Money withdrawn from this can be used for any personal need from using to add some money to your monthly budget to fund a vacation. One is completely free to use the money borrowed from a line of credit.

Eligibility: The eligibility criteria to get approved for a personal line of credit depends on the particular lender with whom you are applying. However, it mostly includes the applicant’s age, income, and repayment capacity. 

Secured and unsecured Personal line of credit

Secured Personal Line of credit: A secured line of credit needs collateral to back up the borrowed money. This collateral can be any of your assets or your fixed deposit or the amount in your savings account. In the case of non-repayment, your ownership of the asset is at risk. But in return for it, the interest charged on a secured line of credit is comparatively low. 

Unsecured Personal Line of Credit: As the name suggests an unsecured line of credit does not require any collateral to back-up your borrowing. This way you are not risking the ownership of your asset as well. The interest charged for it is comparatively more.

However, you need to have a high credit score and good repayment history to avail a personal line of credit. Since the unsecured credit line is not backed with collateral, it becomes even more important not to default with any of the payments.

Benefits of Personal Line of Credit over Personal Loan
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Benefits of Personal Line of Credit over Personal Loan
Read onto this Finance Buddha blog to know the Benefits of Personal Line of Credit over Personal Loan 2020
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