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Mar 19
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line of credit

The Basics of a Line of Credit: Decoded

When it comes to borrowing money, there are plenty of options available to borrowers. You can approach banks, NBFCs for a traditional loan product, or pay a visit to your neighbourhood pawn shop (not that good an idea), borrow from your friends and family, or use credit cards (if you haven’t maxed them out).

One of the lesser used options is the LOC (Line of Credit). While the line of credit has been in existence for several years, they aren’t as popular as loans. One main reason for this is that most banks and NBFCs, don’t advertise LOC as they do other financial products.

If you’re hearing about LOC for the first time, then you’ve come to the right place.

What is Line of Credit?

Simply put, it’s a flexible loan available to both individuals and businesses. Just like a credit card offers you a particular amount of funds that you can use whenever you need it, an LOC is a specified sum of money, which you can access whenever required. You can then repay it immediately or over a period, according to your convenience.

Here are a few things that you must know about the Line of Credit to get a better understanding of them.

  1. How are they different from loans?

Unlike a loan, you don’t pay interest for an LOC until you use it. Additionally, the loan amounts are usually provided to you as a one-time payment. On the contrary, you can use as little or the entire LOC amount based on your convenience.

  1. Who provides them?

Several NBFCs and a few banks offer a Line of Credit. You can even apply online for one.

  1. A Line of Credit sounds similar to a bank OD. Are they the same?

Yes and No. The overdraft protection offered by banks is an automatic line of credit. If your account drops below the minimum balance, the bank makes the payments for you and then charge an interest along with an Overdraft fee.

With a Line of Credit, there are no fees, and the interest rates are often lower.

  1. Is there only one type of Line of Credit?

There are two major classifications: Secured and Unsecured. If you have availed loans, then you would be familiar with these two types. In secured, you submit collateral as a guarantee, whereas in unsecured there is no need for collateral.

  1. What is the maximum limit that I can avail with an LOC?

The amount depends on several factors like your CIBIL score, credit history, repayment capacity, employment status, other loans you have availed and so on.

  1. What are the other benefits of a Line of Credit?

One of the major benefits of a Line of Credit is its ease of usage. You can withdraw cash at an ATM, transfer money to other accounts, just like you handle your regular savings account.

Another biggest benefit is the low-interest rates. The interest rate for an LOC is meager when compared to credit cards and other loan solutions. However, the interest rate is often floating. Meaning it can go up or down, depending on the market conditions.

  1. A Word of Caution

A line of credit provides a tempting solution to funding your dreams and wishes. While it has its benefits, it’s easy to sink into the debt trap hole when using an LOC. Keep an eye on your limits, and you’re all good.

The Bottom Line

Like any loan product, a Line of Credit is a double-edged weapon. Handle it carefully, and it can come quite handy to meet your emergency cash requirements.

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