In the time of financial trouble, every individual wants quick cash to get through the situation. Banking institutions and other financial organizations offer loans to meet the immediate needs of those who are having financial difficulties. These loans are very helpful to people because they encourage them when they require money.
However, the conventional lending system has its drawbacks as well. Banking institutions strongly maintain a bare minimum limit within which they fail to offer a loan. This indicates that even if an applicant does not require a certain amount, he or she must borrow at least the lowest amount declared by the specific bank.
As an example, even though you are not seeking a loan of Rs. 50,000, you will be obliged to take one if your financial need is only Rs. 10,000 and the bank you are dealing with won’t grant you a loan below the minimum value of Rs. 50,000.
In these situations, the borrower’s primary issue is the large monthly interest payment. They have to pay back the interest charges for the loan. The bank will charge interest on the full loan amount even if the applicant just uses a portion of it as needed.
This will eventually result in additional expenses and cause the borrower to run into more financial difficulties. Banks have developed a simple way to address this problem by introducing the “Line of Credit.”
A Line of Credit: What Is It?
The Line of Credit is a lifeline for people who require financial assistance regularly. Under this arrangement, a borrower can apply to a bank for a specific loan amount. But they are not required to take out the whole sum at once.
Following approval of the loan, the applicant can withdraw a small portion of the total sum for immediate needs and retain the remaining balance with the bank. Only the amount of money that the customer has withdrawn will be subject to interest; the whole amount will not be. The borrower is therefore freed from having to worry about loan EMIs and can conveniently manage his or her monthly costs.
In comparison to a regular loan, the borrower must pay lower interest rates under this financing system. It functions similarly to a credit card in that you can only pay for whatever amount you have used, not the whole credit limit.
Assume that, by your LOC application, the bank has approved Rs. 50,000 for you and that you are taking out Rs. 10,000 to meet your needs. You are just required to pay the interest on Rs. 10,000 in this case, not the entire amount.
Which Types of Lines of Credit Are Available in the Market Now?
There are primarily two types of lines of credit, which are listed here for your convenience:
Secured: In a secured line of credit, the interest rate that the bank charges is comparatively low.
This is because the bank offers loans based on the acceptance of certain of your valuable assets as security. Additionally, the applicant’s earnings and credit score are taken into account before the interest rate is determined.
Unsecured: The interest rate that the banks charge is higher than in a secured line of credit simply because no collateral is accepted by the banks. Because of this, there are fewer opportunities for payback with this kind of credit, which raises the interest rate.
How Can You Apply for a Line of Credit?
Applying for a LOC is a pretty easy process. All you have to do is visit your bank and submit an application for it. You have to submit the application form along with the necessary paperwork. Before processing the loan request, the bank will verify your monthly income and credit score. Your credit score, monthly earnings, and level of security will all play a role in determining the ultimate loan amount and interest rate.
What Benefits Do Lines of Credit Offer?
Borrowers can profit greatly from LOC in numerous ways. Following is a list of a few of them:
Banking institutions charge a lower interest rate on LOCs than they do on standard loans.
In a line of credit system, the applicant can take very little money. However, in a traditional lending process, the borrower cannot take out less than the minimum sum stipulated by the relevant bank.
- Only the portion of the credit limit that has been used must be paid in interest by borrowers. The borrower will not be charged interest on the remaining balance.
- Self-employed people benefit from LOC because it allows them to set up low-risk businesses and take the money in smaller amounts.
- This gives business owners peace of mind since they know they have a sizable sum of money in the bank that they can access whenever needed.
- People can easily choose LOCs and satisfy their needs if they don’t want to take out personal loans because of the high interest rates associated with them.
- If you choose a line of credit, you will likely have a much higher credit limit than what is typically available for regular loans.
How Does the LOC Repayment Process Work?
The LOC repayment process is quite similar to that of a credit card. There will be a due date for repayment after you have used some of the credit limit on your loan. If you require additional funds before the original loan is repaid in the interim, you easily have access to them.
Assume that if you cash out Rs. 20,000 from a Rs. 1 lakh LOC, you will only be required to pay interest on Rs. 20,000 and not Rs. 1 lakh. Once you take out a Rs. 20,000 loan, you will be given an easy-to-repay repayment due date (principal plus interest).
How Can You Keep Track of Your Line of Credit?
Your bank’s monthly statement makes keeping track of your loan obligations simple. In this era of paperless banking, banks typically prefer to deliver e-statements to your registered email address; however, there are other ways for them to reach you.
To stay at the forefront of matters, always review your statement monthly or quarterly, depending on the option you selected. Before taking out a new loan, make sure you know how much is left on your current one. You must pay off your debt before applying for a new loan. If at any moment you are confused, call the bank’s customer service number to speak with bank personnel.
Who Should Beware of Choosing a LOC?
A line of credit is a great way for consumers to meet their needs for money while paying a low interest rate. To get the most advantage, though, all good things must be used carefully. It is preferable to stay away from LOC if you lack financial discipline or if you are unsure about your ability to repay the loan. LOC is similar to a credit card in that it may be a lifeline for those who use it responsibly, but it might turn stressful if misused or applied carelessly.
Is it a Good Idea to Use a LOC to Support Wedding Expenses?
The cost of a wedding is never certain when we discuss it. In this case, a line of credit (LOC) might be a great option for you. Because it will give you the freedom to borrow the necessary amount of money at a lower interest rate.
It will provide you with a higher profit than regular loans. It makes sense to take out a line of credit rather than a regular loan. Because there’s a chance you won’t have enough money or that you’ll take out more than you need. Whatever the situation, you will bear the loss in both.
A LOC will provide a significantly higher credit limit at a lower interest rate than a standard loan. Thus, you won’t have to worry as much about breaking the bank throughout the wedding.
How Can LOC Help Your New Business?
The foundation of a new business is dynamic uncertainty. There are times when these unforeseen circumstances will make you smile, and there are other times when they will leave you confused. Because the borrower can withdraw funds as needed, a line of credit (LOC) is the best option for small, starting enterprises that are vulnerable to losses and emergencies.
In the current unpredictable market, projecting a final amount for business is nearly impossible. There is a strong likelihood that you could run out of funds, in which case you will need money right away. When you apply for a business loan, you will only be given a certain amount, which you will probably use up quickly.
However, there’s a good possibility the bank will grant a sizable loan for your company if you choose LOC. You will find it easy and stress-free to take risks when you are confident in your security. Since in business, there can be no profit without risk, a line of credit will be ideal in this situation.
How Will You Choose the Best Lender for a Credit Line?
Customers in India can get Lines of Credit from several institutions. It is your responsibility as a borrower to review their terms and conditions before making any decisions. Check the interest rates offered by all of the major banks and pay them a personal visit to learn about any hidden fees.
Use web-based tools to compare the interest rates offered by several banks and select the one with the lowest rate to maximize your savings. Additionally, confirm whether or not the bank offers draft protection. Your account will be linked to an overdraft so that, should you run out of funds, your overdraft will cover you. Before making your choice, you should also evaluate the fees associated with the bank’s overdraft option.