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The financial partners in the market are coming up with new services and products to help customers finance their small and big-ticket expenses. While there are various financial products in the market, line of credit is slowly becoming a popular one. A line of credit is a flexible financing option that can provide you with access to funds when you need them.
In this comprehensive guide, we will touch upon the following pointers:
- What is a Line of Credit?
- How does a Line of Credit works?
- Types of lines of credit
- Benefits of having a line of credit
- Conclusion
What are credit lines?
A line of credit is a type of loan that allows you to borrow money up to a certain limit. Unlike a traditional loan, where you receive a lump sum of money upfront and repay it over time with interest, a line of credit gives you access to funds that you can borrow as needed. You only pay interest on the amount you borrow, not the entire credit limit. Once you repay what you borrowed, you can borrow again up to the credit limit.
It is basically a revolving credit account, which means that as long as you make minimum payments, you can borrow and repay as many times as you want until the credit limit is reached. The funds are available to you whenever you need them, and you can use the money for any purpose, such as home renovations, education expenses, or unexpected bills.
How Does a Line of Credit Work?
It works in a similar way to a credit card. You apply for a line of credit with a financial institution, and they will approve you for a credit limit based on your credit score, income, and other factors. Once approved, you can access the funds by writing a check or transferring money from the line of credit to your checking account.
The interest rate on a line of credit is usually variable and tied to the prime rate. This means that the interest rate can change over time depending on the market conditions. You will only pay interest on the amount you borrow, and the interest will be added to your outstanding balance. The minimum payment will be based on the interest and a portion of the principal, and you can choose to pay more than the minimum payment if you want to reduce your balance faster.
Types of Lines of Credit
There are different types of lines of credit that you can choose from depending on your needs.
- Personal Line of Credit
- Business Line of Credit
- Secured Line of Credit
Personal Line of Credit
A personal line of credit is an unsecured loan that is based on your creditworthiness. You can use the funds for any purpose, and the interest rate is usually higher than a secured line of credit. The credit limit is also lower than a secured line of credit.
Business Line of Credit
A business line of credit is a revolving credit account that is designed for businesses. The credit limit is higher than a personal line of credit, and the interest rate is usually lower. The funds can be used for any business purpose, such as inventory purchases, equipment financing, or payroll expenses.
Secured Line of Credit
A secured line of credit is a loan that is secured by collateral, such as your home or other assets. The interest rate is usually lower than an unsecured line of credit, and the credit limit is higher. However, if you fail to repay the loan, the lender can seize your collateral.
How to apply for a Line of Credit?
Follow these 4 simple steps to apply for a line of credit:
- Visit the nearest branch of a lender. You can also check lender’s official website.
- Fill up the relevant form and attach all the documents. The list will be provided by the lender.
- The lender will do a thorough check about your credit score and history. Your income will also be considered.
- If you qualify the check, the bank will sanction the LOC for you.
Benefits of Having a Line of Credit
There are several benefits of having a line of credit, including:
Flexibility
A line of credit provides you with flexibility to access funds whenever you need them. You can borrow and repay as many times as you want until the credit limit is reached.
Lower Interest Rate
The interest rate on a line of credit is usually lower than a credit card or personal loan, making it a more cost-effective financing option.
Improving Credit Score
A line of credit can help you improve your credit score if you use it responsibly. Making on-time payments and keeping your balance low can increase your credit score over time.
What is the repayment procedure for a Line of Credit?
Repayment procedure for a line of credit is similar to a credit card. You can borrow a said amount from the credit line. A repayment period will be set. You will need to pay the amount in that particular period. However, if you need to borrow more from the line of credit, you can take out the money even before closing the earlier amount.
The amount is paid using a scheduled EMI method, just like a loan.
How to track your Line of Credit?
You can keep a manual track of your Line of Credit by regularly checking your monthly statements. Or you can also use online tools dedicated to help you keep track of your LOC.
How can I select the right Bank for a LOC?
Research and Compare! As a borrower looking for the right bank for a LOC, you need to compare interest rates charged by various banks for a LOC. It is also recommended to visit these banks in person to learn about any hidden clause or fee.
Should you apply for the Line of Credit?
A line of credit can be a useful financing option for those who need flexibility and access to funds when they need them. You can also opt for Airtel Flexi Credit to get flexible and instant personal loans without any delay! You can apply for the loan from its website or from the Airtel Thanks app’s financial services tab in the Shop section.
We recommend you use a line of credit responsibly and only borrow what you can afford to repay. With these tips in mind, you can make an informed decision on whether a line of credit is right for you.
Also read: What Is an Unsecured Personal Loan?
