If you want to renovate your home or take a dream vacation, a Personal Line of credit is your best bet. When you need funds immediately, and don’t want to waste time on applying for a loan, a personal line of credit proves to be very useful.
What is Line of Credit?
A Line of Credit is a financial arrangement with a bank that offers a predetermined loan amount. The best thing about a personal line of credit is that you pay the interest only when you utilise the amount. The bank offers you an overdraft and you can withdraw from your line of credit as and when required. You also get to make any number of withdrawals and repayments. You must ensure you don’t exceed the agreed amounts, and make timely repayments.
While business lines of credit have existed for a long time, personal lines of credit are gaining popularity when compared to other types of loans. This is courtesy of the easy availability of funds at low interest rates without the need for any collateral.
Often, people apply for a Personal Loan when funds are needed at short notice. But, an interest rate on a Personal Loan can be high, ranging between 16% and 28%. These interest rates on lines of credit are 2% to 3% more than the bank’s prime lending rate. On a Personal Loan, you pay the EMI, which is calculated on the entire loan amount payable from day 1. However, the interest on the line of credit is chargeable only when you begin to utilise the credit and on the outstanding balance.
A line of credit proves highly beneficial as long as you take care not to exceed the credit limit.
Advantages of a Personal Line of Credit
Quick and easy access to funds
You get quick and easy access to funds when you open a personal line of credit. You can withdraw the money through cheques, bank transfers and from ATMs.
No collateral/security
A Personal Line of Credit does not call for any collateral. The line of credit is offered to you based on your credit score and credit history.
Flexibility
You can open a line of credit as and when the need arises. There is no stringent rule on how to employ the line of credit. Akin to a Personal Loan, a Personal Line of Credit can be utilised as per the borrower’s needs.
No limit on the number of lines of credit
Banks may not be willing to give you a loan if you already have a number of outstanding loans. However, there is no limit on the lines of credit that you can open. You can open a line of credit, make repayments, and open another fresh personal line of credit.
Overdraft protection
Most banks offer a line of credit as an overdraft facility against your bank account. In a typical overdraft facility, if your balance goes down to zero, the bank pays the money and charges you a fee plus interest. However, in a line of credit, overdraft facility is provided without any fee.
Low interest rate
Interest charged on a personal line of credit is lower than the interest on credit cards and Personal Loans. Generally, the interest rate is linked to the bank’s lending rate and is 2 % to 3% higher than the PLR. Furthermore, you pay interest only on the amount utilised and not the amount borrowed.
Eligibility for a Personal Line of Credit
Getting a Personal Line of Credit is entirely dependent on your credit history and credit score. A solid credit history backed by a high credit score is your assured ticket to availing a Personal Line of Credit.
Personal lines of credit are a good option when it comes to need based borrowing. You not only save on interest but take full advantage of the revolving credit and utilise it to your financial advantage.
