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Whenever there is a financial crisis, people want to get some quick money to deal with the situation. To address this need of individuals, banks and other financial institutions provide loans to meet the immediate needs of people who are in financial trouble. These loans are extremely beneficial for people as that provide them financial support when they are in need of money.
But the traditional system of lending has its limitations as well. Banks strictly maintains a minimum limit below which they don’t offer a loan. It means even if a borrower is not in need of a certain amount, he or she has to borrow at least the minimum amount declared by the particular bank. For example, if your requirement is only Rs.10,000 but the bank you are applying with doesn’t give loan below the minimum amount of Rs.50,000, you are bound to take a loan of Rs.50,000 though you don’t need it.
The main problem that the borrower faces in such cases is the high-interest outgo that he or she has to pay every month for the loan. Even if the borrower uses only a fraction of the loan amount as per requirement, the bank will charge an interest on the entire amount which results in extra interest outgo triggering out more cash problems for him or her. In order to resolve this issue, banks have come out with an easy solution which they named as the “Line of Credit”.
The Line of Credit is a blessing for those who need financial aids at regular intervals. In this system, the borrower can apply for a particular loan amount from a bank but he or she needn’t take the entire amount in one shot. Once the loan amount is approved, the borrower can take a small amount out of the entire fund for present need and keep the remaining amount with the bank. The interest will be charged only on the amount that the borrower has withdrawn and not on the entire amount. As a result, the customer can manage his or her monthly expenses easily without getting burdened with the loan EMIs.
In this lending system, the borrower also has to pay lower interest rate compared to a traditional loan. It is like a credit card where you can pay the charges only for the amount that you have used and not for the entire credit limit.
Suppose, the bank has sanctioned Rs.50,000 to you based on your LOC application and from the approved amount you have taken out Rs.10,000 as per your requirement. In such an instance, you have to pay the interest amount for only Rs.10,000 and not for the total amount.
There are mainly two different types of LOC which are detailed out here for your ease of reference:
Secured- In this type of LOC, the interest rate charged by the bank is relatively low. This is because, in a secured line of credit, banks offer loans after accepting some of your valuable assets as security. Moreover, the income of the borrower will also be considered along with his or her credit score before finalising the rate of interest.
Unsecured- The interest charged by the banks in this type of LOC is higher compared to the interest rate of secured LOC. Being unsecured in nature, the banks do not take any of the borrower’s asset as security. Hence, the chances of repayment are slightly on the lower side in this type of credit and consequently, the rate of interest goes high.
The procedure to apply for LOC is very simple. You just need to step into your bank and apply for the same with all the required documents. The bank will check your credit score and your income per month before approving the loan request. The final credit amount and the interest rate will be based on your credit score, monthly income, and security.
LOC comes with a lot of benefits for the borrowers. Some of them are listed below:
Repayment procedure of LOC is same like that of a credit card. After you have cashed out some amount of your loan’s credit limit a deadline will be set for repayment. In the meantime, if you are in need of some more cash before the repayment of the first one, you can get that without any trouble.
Suppose, if you have LOC of Rs.1 lakh and you cash out Rs.20,000 you will have to pay interest for only Rs.20,000 and not for Rs.1 lakh. After you take out Rs.20,000 loan a deadline will be set for repayment in easy EMI (Interest + Principal amount). And in the meantime, if you need Rs.50,000 more, the total interest will be charged on Rs.70,000 which you need to repay within the specified timeframe.
You can easily track your LOC from the monthly statement sent by the bank. Though, there are various modes through which the bank can send you the statement, in this paperless banking era, banks usually prefer to send e-statements to your registered mail id. Always make sure to check your statement every month or quarterly whichever mode you opted for in order to keep a track of the same. Check the remaining balance before you take any new loan as it is mandatory to clear the outstanding dues before opting for a new one. At any point in time if you have any confusion reach out to the bank executives through the bank’s customer care number to get all the details instantly.
Line of Credit is a very good option for people to meet their financial need by paying low-interest rate. But every good thing must be utilised wisely to reap the maximum benefit out of it. If you are not disciplined regarding financial matters or in case you are not sure about your repayment abilities, it is better to avoid LOC. LOC is like a credit card- it's blessing for those who use it wisely but can turn into a nightmare if used in a wrong way without discretion.
When we talk about marriage the cost is always uncertain. In this situation, LOC can be an ideal choice for you as you will have the flexibility to take the required amount of money as per your requirement with less interest. In this way, it will offer you more profit than the traditional loans. Taking a line of credit instead of loans is a good idea because if you go for a traditional loan there are possibilities that you might get short of money or might take more than required. Whatever the case is, in both the cases the loss will be yours. Compared to a traditional loan, LOC will give much higher credit limit with less interest rate. So, you can enjoy the wedding without worrying about your budget a bit.
A start-up business is all about uncertain dynamic situations. Sometimes, these unexpected situations might bring a smile on your face, but there might be instances when these situations will leave you perplexed. Hence, for small startup businesses which are prone to loss and emergencies, LOC is the ideal choice because the borrower has the choice to take out cash as per his or her requirement.
Estimating a final amount for business in the present dynamic market is next to impossible. There is a high possibility that you might run out of cash and at that cash-crunch situation, you will be in need of immediate money. If you apply for a business loan, you will get a limited amount at one shot which you are most likely to exhaust in a short time-period. But when you opt for LOC, there are high chances that the bank will approve a huge amount of loan for your business. When you know you have a security assurance taking risk will be quite easy and stress-free for you. In business, no risk means no gain and this is where a line of credit will perfectly work for you. It will provide you the financial support to take risks and aid you in the most unfavourable situations.
There are several banks in India which provide Line of Credit to their customers. As a borrower, you must read their terms and condition before taking any final decision. Compare the rate of interest of all the prominent banks, visit each of them personally to find out any undisclosed clause. Take help of online websites to find out the rate of interest of each bank and choose the lowest interest to get the maximum benefits. You should also make sure that the bank is providing draft protection or not. Overdraft will be connected to your account so that in case you run out of money your overdraft facility will come to your rescue. You should also compare the charges for overdraft facility provided by the bank before making your final decision.
If you want to get the maximum out of your line of credit, the best thing is proper upstanding and planning. Always remember that you have taken a loan and the same has to be repaid with interest. Check out the following points to reap the maximum benefit out of your LOC:
Line of Credit or LOC can offer huge benefits to the self-employed individuals or business professionals with unstable monthly income. People who have unstable monthly income are usually scorned off by the banks and are not considered to be eligible for a loan. LOC is the saviour of such individuals who are need of constant money throughout the year. After the loan gets approved, the borrower can withdraw the amount that he or she needs to meet the existing need. The best thing about this system is, the customer will be charged only for the amount that he or she has actually used regardless of how much was sanctioned to him or her. This will make repayment easier for the borrower as the person can select the repayment period and accordingly can repay the amount along with monthly interests conveniently.
In India, LOC can play a big role in improving the lives of people with a low or unstable source of income. These groups need a constant flow of cash to back up events or requirements such as marriage in the family, kid’s education, home construction etc. In these situations, as the required amount is uncertain, it is difficult for the borrowers to decide how much amount they want in the first go. Hence, they have the flexibility to take out any amount they want from the approved credit limit. Apart from this flexibility, the borrower can also enjoy other benefits such as low-interest rates compared to the traditional loans offered by banks. If LOC reaches all the sections of the society, it will surely change the life of people to a great extent.
In short, Line of Credit is a loan system which if used smartly can help you fulfil all your financial needs. So, opt for it and gain the maximum profit from your Line of Credit amount in a stress-free way.