A personal line of credit provides a ready-made access to an approved amount of fund, up to which a beneficiary may easily borrow any amount as and when needed and pay interest only on the amount borrowed till the date of repayment.
“A personal line of credit (LOC) is a combination of a conventional loan and a credit card. In an LOC, the borrower can apply for a particular loan amount from the bank but can utilise a portion of the entire amount sanctioned as and when he needs and can keep the remaining amount with the bank,” said Nitin Mathur, CEO, Tavaga Advisory Services.
Expressing his views on LOC, Anil Pinapala, CEO & Founder of Vivifi India Finance, said, “A personal line of credit offers the flexibility to time your repayments unlike an EMI based loan, which forces a fixed amount and a fixed time frame for repayment. In addition to the flexibility in repayment, a line of credit is also available on-demand without the need to apply for a loan each time a you want to use credit to finance your then needs.”
A customer doesn’t have to pay any interest on availing the LOC facility. Interest is charged only on the amount borrowed for the period of borrowing.
“Unlike a conventional loan, in an LOC, the interest is charged only on the amount that the borrower has withdrawn and not on the entire loan amount sanctioned,” said Mathur.
“Like for example You have a LOC of Rs 1 lakh and you have withdrawn only Rs 40,000, you pay interest on only Rs 40,000. And once you pay back the Rs 40,000, you have a Rs 1 lakh limit available again,” he explained.
Talking on the types of LOC, Mathur said, “LOC can be secured or unsecured depending upon whether the loan is disbursed against a collateral or not. A secured LOC carries a lower rate of return than an unsecured LOC.”
“Most banks and financial institutions, including as well as NBFC entities, have started offering a line of credit in India. The final loan amount sanctioned and the interest rate approved by the bank will be based on the borrower’s credit history, monthly income, existing debt and the availability of collateral,” he added.
But you should borrow only when there is an urgent need for funds and not because you have ready access to credit.
“An LOC facility is generally availed by a borrower, when he/she has an incremental fund requirement or needs financial aid to make purchases or payments at regular intervals. LOC provides flexibility in terms of interest payment on the amount utilised, and allows borrowers to borrow multiple times within their limit without additional charges. But may come with additional charges or fees. An LOC is a loan after all and needs to be repaid and should therefore be applied for and used prudently,” said Mathur.
Expressing his view, Anshuman Narain, Vice President, Cash Bean (P.C. Financial Services Pvt Ltd), said, “Personal line of credit should be strictly reserved for unexpected or emergency use only. This is a reserved pool of capital available to you and you only pay interest on what you borrow so one should use it for say home upgrades, medical expenses or car repairs. Businesses may use it for their seasonal cash requirements.”
Talking on when to use LOC, Pinapala said, “Switch over to a line of credit for smaller needs helping you tide over the month-end blues or when you are struggling through tough times and do not want the burden of an EMI loan. Whatever may be the situation, be responsible for your repayment obligations as it impacts availability of credit for all future needs.”