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The Line of Credit is a blessing for those who need financial aids at regular intervals. In this system, the borrower can apply for a particular loan amount from a bank but he or she needn’t take the entire amount in one shot. Once the loan amount is approved, the borrower can take a small amount out of the entire fund for present need and keep the remaining amount with the bank. The interest will be charged only on the amount that the borrower has withdrawn and not on the entire amount. As a result, the customer can manage his or her monthly expenses easily without getting burdened with the loan EMIs.
In this lending system, the borrower also has to pay lower interest rate compared to a traditional loan. It is like a credit card where you can pay the charges only for the amount that you have used and not for the entire credit limit.
Suppose, the bank has sanctioned Rs.50,000 to you based on your LOC application and from the approved amount you have taken out Rs.10,000 as per your requirement. In such an instance, you have to pay the interest amount for only Rs.10,000 and not for the total amount
Different Types of Line of Credit
There are mainly two different types of LOC which are detailed out here for your ease of reference:
Secured- In this type of LOC, the interest rate charged by the bank is relatively low. This is because, in a secured line of credit, banks offer loans after accepting some of your valuable assets as security. Moreover, the income of the borrower will also be considered along with his or her credit score before finalising the rate of interest.
Unsecured- The interest charged by the banks in this type of LOC is higher compared to the interest rate of secured LOC. Being unsecured in nature, the banks do not take any of the borrower’s asset as security. Hence, the chances of repayment are slightly on the lower side in this type of credit and consequently, the rate of interest goes high.
Advantages of Line of Credit
LOC comes with a lot of benefits for the borrowers. Some of them are listed below:
- The rate of interest charged by banks on LOC is comparatively lower than the traditional loans.
- The borrower can take very less amount in the line of credit system, whereas in the typical lending process the borrower cannot avail an amount lower than the minimum amount set by the concerned bank.
- Borrowers need to pay the interest rate only for the used amount of the entire credit limit. For the rest of the amount, no interest rate will be applicable to the borrower.
- For self-employed individuals, LOC is immensely beneficial as they can take the amount in a smaller quantity and set business with low risk.
- This provides mental peace to the people who are into business as they know they have a substantial amount of money in the bank that can be claimed any time if required.
- Individuals who don’t want to go for personal loans owing to the high-interest rates charges, can easily opt for LOC and meet their needs.
- While you opt for a line of credit, you can expect to have a very high credit limit compared to the limited loan amount offered in traditional loans.
