In life, there are some instances when an individual’s savings and other financial resources fall short. This usually happens in the face of certain emergencies- medical or otherwise, or big-ticket expenses such as a wedding, education of children, home renovations, etc. In such instances, the first instinct of the individual is to approach Banks or Non-Banking Financial Companies and seek credit or a loan.
In most cases, a conventional loan such as a Car Loan or a Personal Loan is readily available. These loans are based on the phenomenon that a fixed amount of money is lent to the individual, which must be repaid along with interest in equated monthly instalments over a stipulated period of time.
While this Type of Personal Loan works perfectly fine for some borrowers, it poses some limitations for others. For instance, in most cases, the minimum lending amount is pre-decided by the lender. Hence, if the borrower is in need of only a small amount of money, they would be required to borrow the minimum amount set by the lender, and then pay the seemingly high-interest rate on the excess amount.
Take the case of Personal Loans, wherein most banks offer a minimum loan amount of Rs. 50,000. In case the borrower only needs Rs. 25,000, the bank wouldn’t agree, leaving the borrower with no option but to take the entire Rs. 50,000, and repay the same along with interest. The interest outgo on the additional Rs. 25,000 will be an additional financial burden on the borrower, considering the fact that they didn’t need the larger sum of money, to begin with.
Fortunately, you can now seek a convenient solution to this age-old issue in the form of Line of Credit. Let us understand this concept in greater detail.
Line of Credit is essentially a loan system specifically drafted for individuals who might require financial aid from time to time. This system allows the individual to apply for a specific loan amount from the bank; however, it is not mandatory for them to borrow the entire amount in a single go. After the bank approves the overall amount, the borrower can choose to withdraw a smaller amount from the fund to finance their current need and save the rest for any future obligations.
In this case, the interest is only levied on the actual borrowed amount, and not on the entire approved amount, making it cost-effective for the borrower. This, in turn, helps the borrower to manage their monthly EMIs more efficiently.
Lines of Credit, or LOCas they are popularly known, can be categorised into two types-Secured and Unsecured. Let us take a quick look at both of these –
As the name suggests, to procure a loan under this category, the bank expects the borrower to pledge a valuable asset in exchange for the money. Since the risk proposition for the bank is rather low, this type of LOC enables the borrower to get the amount for a comparatively lower rate of interest.
In this case, the banks solely approve the loan on the basis of the income and the credit score of the borrower, albeit at a higher interest rate (due to increased risk proposition as a result of the absence of any collateral for security).
Contrary to popular belief, applying for a Line of Credit in India is rather simple. All you need to do is approach your chosen bank with the required set of documents including –
In case you wish to pledge an asset against the loan amount, you would also need to furnish the relevant documents for the same.
Once the bank verifies these documents and checks your Credit Score, they will approve the loan request. As mentioned earlier, the rate of interest applicable on the loan is largely determined on the basis of the asset pledged (if any), your monthly income as well as your credit history.
If you have owned a Credit Card at any point in time, and are familiar with the payment procedure for the billed amount, then it will be a piece of cake for you to understand the repayment process for LOC.
To make this simpler, let us illustrate with an example. For instance, your approved credit limit for LOC is Rs. 1 Lakh. If you cash out Rs. 50,000 at a given point in time, you will be given a deadline to repay the entire amount in the form of EMI, which would be inclusive of both, the Principal Component as well as the Interest Component.
In the meantime, if you need an additional Rs. 10,000 you can cash the amount easily. In this case, you will be required to repay the total of Rs. 60,000 as well as the interest charged on the amount, within the stipulated repayment period.
As you may have guessed by now, LOC entails a wide array of benefits such as the ones listed below:
Lower Interest Rate – If the borrower opts for Secured Line of Credit, the rate of interest levied on the loan amount is considerably lower as compared to that accrued by regular loans. The LOC is highly recommended to individuals who cannot afford the exceedingly high Personal Loan Interest Rates.
Higher Flexibility – Once the bank approves the amount for LOC, the borrower can withdraw as low or as high an amount, provided it is within the approved limit. Borrowers are not entitled to this flexibility when it comes to other loan types such as Personal Loans.
Cost-Effectiveness – The borrower is only liable to pay interest on the actual borrowed amount, and not on the entire credit that has been approved by the bank.
Ideal for Business Owners – New business owners often do not have the means to service a substantial loan all at once. Besides, their financial needs vary from time to time. LOC proves to be the most optimal loan type for such individuals, especially owing to the low-interest rates and higher flexibility.
High Credit Limit- Compared to traditional loan products, the borrower can enjoy an exceptionally high credit limit, thereby giving them the much-desired freedom to manage their financial obligations.
While getting your LOC request approved is rather easy, you must understand the importance of using this flexible loan type in your best interest. To this end, here are some tips that you should adhere to –
Opt for the loan, only when you are in absolute need for the money.
Make sure you have a sound plan regarding how you are going to use the loan amount.
Try taking smaller loan amounts, and paying them in full before withdrawing more money. This will help you efficiently manage your repayments.
Since you are already opting for a Short Term Loan, you should consider setting your credit card aside; else you may end up in a two-fold debt.
Whenever you withdraw funds from your LOC, make sure you have a repayment plan laid out, with due consideration to your living expenses.
Pay all your EMIs in full, every single month without fail. Not only will this practice ensure efficient repayment of your loan, but will also help you maintain a high Credit Score.
In case you opt for a Secured Line of Credit, you must understand that failure to repay the loan may result in the bank seizing your asset, or even selling it off, as a means to recoup the loss.
Most banks also offer the choice of quarterly payments of instalments instead of monthly repayment. Understand which repayment method better suits your financial situation and make a call accordingly.
Use your sanctioned loan amount only in case of absolute necessity, and never on expensive gadgets, holidays or other such outlandish things. Poor planning of your LOC amount can lead you into serious debt.
If you are unable to pay your EMIs in full, the bank will charge additional interest on the remainder EMI, thus increasing your overall interest outgo. Hence, always pay your EMIs in full.
When you opt for LOC, your bank will send you monthly statements, either via post or through SMS or email. Make sure to keep a check on your statement to know your outstanding balance, and pay it before the due date. In case of any confusion or discrepancy, feel free to get in touch with your bank.
A Line of Credit can prove to be a great financial aid for individuals who do not enjoy a steady stream of income, either because they are self-employed or due to the fact that they work as freelancers. The enhanced flexibility and low-interest rates make this loan type incredibly helpful for those who are on the lookout for small yet frequent Personal Loans. For what it’s worth, if used judiciously, a Line of Credit can help one meet their financial needs in a cost-effective and hassle-free manner.
If you too are looking for a flexible loan alternative that can help you meet your financial obligations without burning a hole in your pocket, Line of Credit might prove to be just the most ideal option!
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