Understanding Line of Credit

Do you face cash crunches at the end of the month? Or planning to buy an updated gadget but couldn’t save much for it? Planning to gift something to your loved one to make them feel special, but you feel restricted as your pocket doesn’t allow it. These situations are common these days but what can be a solution for it until you increase your income. In this real world, you can’t become a millionaire in a day, it takes lots of time and hard work to succeed in life. Then what can be the temporary solution to fulfill your short term cash crunches? Is it borrowing from your friends and family? Well, this will also not work here as no one is there to lend you all the time when you are in need. This is where a Line of credit can help you. 

How Does a Line of Credit Works?

A line of credit is nothing but a type of loan which can be used as a credit card. One can withdraw the credit as per their need without any restriction. Basically, when you opt for a line of credit you get a particular amount sanctioned on your name, and you are free to withdraw from that particular amount anytime you want. It can also be used to pay your bills or to add some cash in your monthly budget. The interest rates on lines of credit are generally lower than personal loans and credit cards.

Why You should choose a Line of Credit?

For many of the reads, it might not be clear that why should they go for a personal line of credit as the same work can be done with a personal loan or with an online personal loan. Let us make the difference more clear to you.

  1. A personal line of credit allows you to withdraw money anytime you want. Whereas to get a personal loan you have to apply with a lender and then wait for the approval. 
  2. With a line of credit, you get funds allotted on your name, from which you can withdraw as per your requirement. Whereas with a personal loan you get the amount disbursed in your account at once. 
  3. In a line of credit, interest is charged only on the amount you used, but when you go with a personal loan interest is charged on the entire disbursed amount. 
  4. The interest rate for a personal line of credit is comparatively low as compared to the interest rate of an online personal loan.

Types of Line of credit

  1. Secured Line of Credit
  2. Unsecured Line of Credit

Secured Line of Credit 

  • When you want to have a secured line of credit, you need to back it up with security or collateral. This adds value to your lending and it wipes off the risks involved. 
  • On the other hand, by adding collateral to a line of credit your eligibility increases and the upper limit of your line of credit gets increased too. 
  • You can give your home, any property or even your stocks, and shares as collateral, but it depends on the lender’s terms and policies. 
  • Apart from adding value to your loan, collateral also brings risk for losing your house or property when you don’t pay back what your borrowings.
  • You can get up to 80% of your collateral equity, as your credit limit.
  • It reduces the interest rate for your borrowing.

Unsecured Line of Credit

  • When you go with an unsecured line of credit, no security or collateral is required and the lenders are at high risk in case of non-payment. 
  • The interest rates for the unsecured line of credit are mostly higher than the secured line of credit. 
  • Good to boost your CIBIL when you are planning to take some bigger loans such as a home loan in the near future.
  • You get approved for a low credit limit as compared to the secured line of credit.

Mostly the secured line of credit is opted for business use & hence called the business line of credit. The credit limit is higher in this case. Whereas an unsecured line of credit is for personal use mostly and hence called a personal line of credit. 

What is a Line of Credit and How Does It Work?
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What is a Line of Credit and How Does It Work?
Life is full of unpredictable expenses like home maintenance, emergency medical bills, car repairs, etc. In such cases, a line of credit can help you afford the costs. Read more to understand it well.
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Finance Buddha
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