There are certain unplanned expenditures and emergencies in everyone’s life. Some use their savings and some go for borrowing from friends, family or from banks. People generally prefer a Personal Loan to meet their personal needs and requirements. But everyone wishes that if the Personal Loan would have been more flexible it would be more comfortable. Personal loans charge interest on the total loan amount, independent of the time period in which you consume it. Whether you utilize the entire loan amount at once or in parts over a time period, you pay the interest on the overall amount instead of only the used amount. This doesn’t suits the borrowers, who are borrowing because they are going to face a crunch for a few months and hence plan to use the loan amount in parts. In such a case, every month a large amount of borrowed but unused amount stays in the bank, but still the borrower keeps paying interest on the total loan amount borrowed. As such, conventional personal loans are not flexible in terms of the interest it levies.
There are many credit options available which includes, credit cards, loans against credit cards and other personal credit loans which includes mortgage loans too to meet such requirements. But these options usually come with a high price along with high interest rate, which means these options may keep you in debt much longer than you’d like due to.
What is a Line of Credit?
A Line of Credit provides a specified amount of credit for a fixed tenor period. One can withdraw as much as they need currently. The interest is payable on the amount used (withdrawn) rather than the whole maximum amount which usually happens in a general loan offering. One can withdraw more when needed. Here you don’t need to go through the loan processing each time when you need money. Even informing your lender is not required. Its usage is similar to that of a credit card. Also you have the right to pre-pay a portion of the loan when you have the surplus money with you. You can re-avail the prepaid amount in case the need arises and when you want to borrow again.
How Does a Line of Credit Works?
A line of Credit work in the same way as a credit card. You can borrow from the LoC until you reach the maximum limit value. But what makes the difference is that the credit card’s limit value is quite low when compared with the Line of Credit. Also the interest you pay on your borrowing is similar to that of a credit card, pay for what you use. But the interest you pay on your borrowing from your credit card is very high, it generally varies from 24% to 36% per annum whereas the interest you pay on borrowing from a LoC is much lower than this.
Let us understand this by an example- suppose you have a line of credit of INR 3 lakhs. This is a pool of money made available to you, which you can use according to your requirement and need. There is no restriction of time and amount that can be used as long as it is less than or equal to the maximum amount. You can borrow even frequently and repay and the interest you need to pay is only on the amount borrowed.
How Does Line of Credit Helps You to Manage Your Expenses?
A Line of Credit is extremely flexible and it allows you to withdraw as many times as required. One can withdraw as long as it is within the credit line which is provided to you. It is one of the most ideal source of finance your unplanned and personal expenses including the urgent needs.
Features of the Line Of Credit that Can Help You Manage Your Expenses
Low Interest- The interest charged on borrowing from a LOC is lower than the credit card loans and other online personal loans. The low interest leads to low EMI and hence it is pocket friendly.
Flexibility to Use- The money borrowed from a personal line of credit can be used for any personal need. For example it can be used for- higher education of your child, home renovation, vehicle repair, vacation, to bear medical expenses and many more.
Flexibility in Borrowing- A Line of Credit provides you a flexibility in borrowing. No long processing. You can borrow as many time as you need. No limitations within your limit value.
No security or Collateral– This is totally unsecured and requires no collateral or security for the borrowing purpose. This facility makes LOC even more affordable in managing one’s expenses.
Part-Payment is allowed- Part-payment is always allowed in LoC. You can part pay your borrowed amount when you are having sufficient amount with you. No penalties and additional charges is imposed when you part pay. This reduces your burden and helps you to repay the borrowed amount in less time than the predetermined time.
A Quick Tip: Compare for Terms and Rates with Other Lenders
Even when you buy small household things, it is always important to compare between other similar products available in the market. This point is valid there also, don’t settle on just one financial institution. When you want a line of credit loan, do research and check and compare the rates and other terms and policies with other lenders so that you can get the best line of credit.
Will your borrowing will have a fixed or a variable interest rate? What will be the payment schedules? And what fees and charges are required to pay? All these are important to know before you get your LOC. So, don’t be in hurry and get the best one for you to manage your expenses.