Personal Line of Credit

Personal Line of Credit A personal line of credit is a type of borrowing that is similar to a personal loan but with additional benefits. It's a cross between a credit card and a personal loan. It's a personal loan that functions similarly to a credit card. It's also an unsecured loan, meaning the borrower doesn't have to put up any collateral to collect the money. Apart from the standard ID and address evidence, salary slips and income tax returns are usually the two most important documents requested.

Personal Line of Credit vis-a-vis Personal Loan

A Personal Line of Credit provides a fixed borrowing amount as well as withdrawal flexibility. The loan amount is approved at the moment of application, but it is not disbursed immediately. Instead, depending on the need at the time, one can withdraw whenever they want. And only the withdrawn amount is subject to interest. Let's imagine Mr A has applied for an Rs. 500,000 Personal Line of Credit. On application, he will be approved for this amount, but he will not receive the complete Rs. 500,000 at once. Instead, he has the freedom to withdraw any amount he wants, whenever he wants. Let's say he wants to buy a new bike and requires Rs. 50,000 to do so. As a result, he deducts Rs. 50,000 from the Rs. 500,000 sanctioned amount. Mr A will be required to pay interest, not on the sanctioned sum of Rs. 500,000, but on the amount removed of Rs. 50,000. In this approach, the Line of Credit provides financial strength to the customer while the withdrawal facility reduces the EMI financial load. In this approach, the Line of Credit provides financial strength to the customer while the withdrawal facility reduces the EMI financial load. There's one more benefit of a Personal Line of Credit that makes it a smart credit option. In contrast to a personal loan, a personal line of credit allows you to pay simply the interest as an EMI. The majority of the loan can be repaid after the term. Taking the above given example, Mr A will have to pay interest only on the amount withdrawn, which is Rs. 50,000. If the interest is say, 10% p.a. , then the interest amounts to 50,000 x 10% x 1/12= 417. As a result, Mr A will only have to pay Rs. 417 in interest for the month. And that'll be his EMI label. He has the option of paying Rs. 50,000 at any point before the loan's term ends. If the loan was for 5 years and he did not make any withdrawals other than Rs. 50,000, he would just have to pay the interest as an EMI each month and could repay the principle whenever he had the funds within 5 years. He has the option of paying back the loan in full or in instalments. In India, the line of credit was once unpopular, but it has exploded in popularity in recent years as savings have become more formalized. People nowadays choose to take up a personal line of credit from a bank rather than borrowing money from friends and relatives.

Personal Line of Credit vis-a-vis Credit Card

The characteristics of a Personal Line of Credit may lead one to believe that it is similar to a credit card. There is, however, a distinction between the two. When compared to credit cards, personal lines of credit typically have a bigger credit limit and a lower interest rate. The interest rate on a personal line of credit is similar to that of a personal loan, which is usually about 13 to 15%, whereas credit card interest rates are often around 36% to 40% p.a. Cardholders with credit cards typically receive additional perks in the form of reward points, money, or gifts. However, there are no such benefits with a line of credit. One of the key advantages of a Personal Line of Credit over a credit card is that it does not have a cash withdrawal restriction, but credit cards have a limit beyond which cash cannot be withdrawn, which means that even in an emergency, cash cannot be withdrawn.

Overall benefits of Personal Line of Credit

Lower Interest Rates

When compared to credit cards, personal lines of credit have substantially cheaper interest rates. It ranges from 13% to 15% of the population.

Lower Installment

When using a Personal Line of Credit, the customer can pay only the interest as an EMI and the principal amount can be paid at the end of the term or even sooner if the customer has adequate means to repay the loan. As a result, the total EMI is reduced because it only includes the interest component and not the primary component. In addition, interest is calculated on the amount withdrawn rather than the whole loan amount. As a result, if the loan amount used is less than the sanctioned loan amount, only the interest on the used portion of the loan will be charged, not the entire loan.

No Collateral Security

A Personal Line of Credit does not require any type of collateral. In addition to ID and address evidence, banks frequently request salary slips or income tax returns as extra papers.

No Hidden Cost

A Personal Line of Credit comes with no hidden fees. There is usually an upfront payment, as well as annual or processing fees, which are all revealed at the time of application.

Unrestricted Cash Withdrawal

In a Personal Line of Credit, there are no cash withdrawal restrictions. Up to the loan limit, one can withdraw as much money as they need. The entire loan amount can be withdrawn in cash. Credit cards, on the other hand, contain a cash withdrawal restriction that prevents you from withdrawing cash even in an emergency.

Flexible Repayment

Only the interest component of a Personal Line of Credit must be paid as an EMI; the principal component, on the other hand, has a flexible repayment option. It is possible to repay it at any moment during the loan's term. As a result, if you need credit to finance your financial needs, think about a Line of Credit. It's a great way to cover short-term expenses because it combines the benefits of two popular credit options: credit cards and personal loans.