Borrowing money has become very popular among the young generation. This is because financial institutions offer a large variety of borrowing options. The range of options is attractive, and the ease of applying online, easier repayment plans, simpler eligibility criteria, and document requirement make loan borrowing a common practice. Different types of loans can be borrowed depending on your eligibility, requirement and the amount you need. One type of loan or credit that you can borrow for different purposes is a line of credit.
This might be a fairly new term for people looking forward to borrowing money for the first time or someone who is not well-versed in financial terms and the finance world. Line of Credit loans are very similar to credit cards and personal loans. They have features of these debts and some properties that make them much more attractive for borrowing. Their interest rates are generally lower, and the borrower is also offered flexibility on when they can access funds. Now, there might be questions like what is a credit line? Or what does the line of credit meaning is? Or how a person can get a line of credit, and how do they qualify for the same?
Worry not; if you wish to know more about this type of loan and are looking forward to borrowing it, this article is just for you. In this article about a credit line, we will discuss and share all the details related to the same. We will talk about this type of credit, how it works, and its different types. If you need help with understanding why you need this type of loan or how you can get this type of loan, we will also be sharing its benefits and the steps for borrowing this loan.
In this article about the line of credit loans, you can know about the line of credit loans, its features, advantages, and types. You can also find out how to qualify for such a loan and how you can apply using a few easy steps.
By the end of this article, you will be able to identify the types of line of credit and how you can qualify for and get this loan for your financial needs. We will also try answering the common questions that people have in our frequently asked questions section to help you clear your doubts.
Table of Contents
Line Of Credit Meaning: What Is A Credit Line?
A line of credit is an unsecured debt that can be borrowed for personal or business needs. A line of credit is very similar to a credit card as there is the amount that a borrower can use, and the amount can be borrowed in parts as per the need and requirement of the borrower. The best part about the line of credit loans is that the borrower only needs to pay interest on the amount he uses and not the total amount like any other type of loan. The loan provider allots the credit limit for the entire term of the loan, and the borrower can choose to withdraw from the same as many times within the course of the loan. A line of credit loan is not an instalment loan where the borrower pays the entire borrowed amount along with interest charged within the period specified by the lender.
Now that we know the line of credit meaning let us move ahead and look at the features of this type of debt, how this loan works and the other important aspects of this loan.
Understanding How A Line Of Credit Works
Line of credit loans are much more flexible when compared to any other type of loan. You only borrow the amount you need and decide the amount you wish to withdraw. You also only need to pay interest on the amount that has been withdrawn by you and not the entire amount borrowed. The loan provider may also allow you to choose the repayment method. The borrower can either repay the entire amount at once or make minimum monthly payments across the entire loan tenure. The tenure of a line of credit loan differs from 2 months to 5 years.
There are two main phases in line of credit loans:
- Draw Period: after your line of credit loan is approved, and your loan provider sets the credit limit, the draw period of your line of credit loan begins. You can withdraw the amount you need during this period as many times as you have reached your credit limit. You might have to make minimum monthly payments or interest-only payments during this period depending on the internal policies of the financial institution that you borrow from.
- Repayment Period: any loan or debt that is borrowed, no matter how big or how small the amount is or what type of debt it is, a repayment needs to be made by the borrower along with interest charged. After the duration set by your moneylender, you will have to start repaying the amount, and you will no longer be allowed to withdraw any more amount.
Common Uses Of Line Of Credit
A credit line allows you to access money on demand. This type of loan can be used for an individual’s personal needs or a company’s business needs or a person. People use credit loans for home renovations, home repairs, construction works, automobile repairs and many other tasks where you might need immediate funds. A line of credit loan can also be used for paying tuition fees for higher education in India or abroad. For any types of major or recurring expenses or emergencies, choosing a line of credit can be a good idea for the borrower.
Types Of Lines Of Credit
Every type of loan can be divided into various sub-types that help the borrower choose which type of loan suits them and which type of loan they can easily borrow. A line of credit can be broadly categorised into two types:
- Secured Line Of Credit: A secured loan, as the name suggests, is offered against collateral. Anyone can borrow a secured line of credit by pledging collateral. If the borrower cannot repay the loan for any reason, the collateral will be seized or liquidated by the loan provider.
- Unsecured Line Of Credit: Unsecured loans, on the other hand, does not require the borrower to pledge collateral. This type of line of credit loans account is the revolving credit account. The loan provider approves this type of loan depending on the client’s credit report, CIBIL score, and internal policies. This type of line of credit loan is offered for comparatively higher interest rates.
An unsecured line of credit loans can further be divided into two different categories: - Personal Line Of Credit: This type of line of credit loan for various purposes. This loan is useful for urgent expenses and needs to be met immediately. These loans can also be used for long drawn expenses. Some of the common purposes of borrowing a personal line of credit are funding higher education, meeting the expenses of a family function or a wedding, home renovation or immediate bills.
- Business Line Of Credit: This type of credit line is the most common type of debt or loan borrowed by businesses. A business line of credit loan can be used to manage the expenses of your business or invest in your business, expand your business, or manage ongoing expenses. Paying wages meeting the working capital requirement and inventory can be some of the uses of a business line of credit.
People with a high CIBIL score can avail themselves of a line of credit loan. A score of 750 or above can help you avail of a loan with much more convenience. The loan provider will also be more interested in offering a loan to someone with a strong credit history, good credit report and high CIBIL score.
Why Use Line Of Credit?
There are various advantages that a borrower gets when applying for a credit line type of loan. The following are the benefits of using a line of credit loan:
- Low-Interest Rates
- High Borrowing Limits
- Greater Flexibility
- Cost-Effectiveness
- Ideal For Businesses
- Offers Constant Access To Funds
- Good For Emergency Situations And Expenses Of Ongoing Nature
Why NOT Use Line Of Credit?
Advantages and disadvantages always go hand in hand. Line of credit loans also have a few disadvantages, and we will be listing the same in this section. Knowing both the pros and cons before applying for a loan can help you find the best type of loan. The following are the disadvantages of a line of credit loan:
- Strict Criteria For Approval
- Not suitable For Debt Consolidation
- Maintenance Charges And Fees
- Revolving Cycle
Credit Cards V/s Line Of Credit V/s Personal Loan – Know The Similarities And Differences
Comparing two types of debts can help you decide which type suits you better and which type you would choose for your financial needs.
When comparing personal loans, lines of credit loans and credit cards, we can find a number of similarities between the three. The most important is that all these debts are unsecured, and the borrower does not need to pledge collateral to borrow money. The money you borrow using these three types of loans can be used for any purpose, and the lender does not have to know the reason for borrowing. The eligibility criteria are simplistic and easy to fulfil. A similarity between credit cards and credit lines is that the borrower only needs to pay interest on their amount. The interest is paid for a personal loan on the entire amount borrowed. For personal loans and lines of credit, the borrower needs to have a strong credit history and high CIBIL score, and there is no such requirement for a credit card.
The differences between these three are as follows:
| Line Of Credit | Credit Cards | Personal Loan |
| Used for recurring or ongoing expenses. | Used for everyday payments and purchases. | Used for any major expenses or emergencies. |
| Interest is only charged on the amount used. | Interest is only charged on the amount used. | Interest is charged on the amount borrowed. |
| The borrower decides the amount to be borrowed. | The borrower decides the amount to be borrowed. | This loan can be borrowed for amounts under Rs. 5 lakhs or even less. |
| Revolving type of credit. | Revolving type of credit. | Instalments type of credit. |
| Payments are variable depending on the policies of the bank. | Payments are variable on the amount used on the card. | Fixed monthly payments. |
Things To Consider Before Applying For Line Of Credit
Certain factors must be considered by a person before deciding on the type of loan they wish to borrow and the loan provider they wish to choose. The following things must be considered before applying for a credit line loan:
- You must assess all the costs, including all types of dictionary fees and charges like processing fee, platform fee convenience fee, late payment charges, prepayment charges, closing account charges and so on. Identify whether or not you can afford the credit line you are applying for.
- Compare and analyse the interest rates and tenures of loans from banks and financial institutions, and loan providers across your city or town to find the best offer.
- To find out the amount that you need to borrow, you must consider your needs, expenses and payments that need your attention. Knowing the amount you need can help you find the right line of credit loans.
- Keep up a high CIBIL score and maintain a good credit report; this is very important if you are looking forward to borrowing an unsecured line of credit. The loan provider will approve or reject your loan largely based on your credit history and CIBIL score. It will also help determine the amount you are eligible for and the interest rate you will have to pay back, along with the loan amount.
- The last and one of the most important points is to make sure that you can repay the entire loan amount along with interest charged in time. This is specifically important because not being able to repay your loan or missing any monthly payments could lead you to pay fines and late payment charges and bring a negative impact on your credit report and reduce your CIBIL score. This will further make loan borrowing in the future a problem for you.
Now that we have discussed the various aspects of a credit line, let us look at the requirements put forward by the bank or financial institution or loan provider before approving the loan application.
How To Get Line Of Credit?
To get a line of credit, you must first decide the amount you need and wish to borrow. You must then research the eligibility criteria of various financial institutions and find out details like the repayment tenure, the interest rates, the amount they offer and other policies. The client should also find the documents needed while borrowing the loan. Commonly, by using the following documents, a client can apply for a credit line loan:
- Identity Proof
- Proof Of Income
- Proof Of Residence
- Proof Of Employment
- Bank Statements from the last 6 months
- Proof Of Age
- PAN Card
- Aadhar Card
The loan provider will verify these documents to approve or reject your loan application. Your monthly income and credit report will influence the amount you can get as your credit limit amount, and the interest rate charged.
We have mentioned the eligibility for getting a loan at the starting of this section. To qualify for a loan, you need to meet the eligibility criteria. The following section will list the criteria you need to meet to qualify for a credit line.
Eligibility Criteria For Line Of Credit
To get your loan application and the required amount approved, you need to qualify for the loan. The eligibility criteria for every type of loan are set by the financial institution or loan provider responsible for offering the same. For a credit line, the following generic points will help you qualify for the loan:
- The client who wishes to apply for a line of credit loan must be an Indian citizen and make sure that they live in a city where the financial institutions offer this type of loan.
- The loan applicant must be above the age of 23 and below 55.
- The loan applicant must be employed in a full-time job and have a minimum monthly income of Rs. 30,000 or be self-employed and have a monthly income of at least Rs. 30,000.
- The loan applicant must have a good credit report, strong history of borrowing and repayment and a high CIBIL score of at least 750 or above.
- The applicant must have all the required documents demanded by the loan provider or as mentioned in the previous section.
Tips To Get Maximum Benefit From A Line Of Credit
Understanding a loan in detail can help you make the most of the same. Properly planning and executing the plans can help you get the maximum benefit from a line of credit loan. In this section, we will be sharing tips on how to get maximum benefits from your line of credit loan. You can use the following tips for getting the most of your credit line:
- Decide the amount you need to borrow and plan how you will use the same before you apply for the loan.
- Unless you have cleared dues from your past borrowing activities, do not apply for this type of loan to avoid going into further debt.
- Try not to use your credit card before completing your credit line loan repayment.
- Do not miss your EMIs or your minimum monthly payments in any case. This can lead to a negative impact on your credit report.
- Try paying more than the minimum amount and avoid carrying forward the payments to the upcoming months. This will help save you from additional fees your loan provider or financial institution charges.
- Do not cross the credit limit.
- Before you make a final decision and sign any documents, make sure you ask all types of questions and doubts regarding the credit line loan and the agreement with the bank or loan provider.
- Ensure that your repayment plan is solid and followed by you properly to avoid getting a negative report on your credit history.
Handling your finances well, keeping a check on your borrowing limits, avoiding any faults, and being a defaulter can help you get the most benefits from this type of loan and maintain a good credit history and high CIBIL score.
Frequently Asked Questions
Even after knowing most details about a service or facility, you might have some doubts or queries related to the same
If you are applying for a credit line for the first time, you may have certain queries and questions about this type of loan. This section has tried to answer some of these questions and bring you all the information you might need to solve your doubts.
1. What is a line of credit, and how does it work?
A line of credit is a type of unsecured debt that offers constant access to funds through the duration of the withdrawal period. The borrower can withdraw any amount from their credit limit and only pay interest on the amount used, not the entire amount they borrowed.
2. Does line of credit affect credit score?
An unsecured line of credit loans are offered to clients based entirely on their CIBIL score and credit report. Hence credit score does play a role in the approval of a line of credit loan. When you apply for a credit line loan, you will drop a few points in your CIBIL score. The repayment of a line of credit loan on time helps you get a better credit report and higher CIBIL score, while doing the opposite gets you a negative remark in your credit report.
3. How long do you have to pay off a line of credit?
There are typically two major phases of a line of credit loan- a draw phase and a repayment phase. As the name suggests, the draw phase is when a borrower can withdraw funds from their credit limit, and the repayment phase is when the borrower pays back the entire amount withdrawn along with interest charged. Many loan providers allow the borrower to pay minimum monthly charges during the draw phase, and some allow the borrower to pay the entire amount after the draw phase is over. The normal period of a line of credit loan is anywhere between 2 months to 5 years.
4. What is a better mortgage or line of credit?
Choosing the better option between mortgage and line of credit will completely depend on your requirement and your capability of repaying the loan. Many people who are not looking forward to immediately repaying the loan and need a lower interest rate choose a mortgage.
Conclusion
We hope this guide about a line of credit loans has introduced you to this type of loan and given you an insight into how this type of loan works and what its features are. We also believe that you would have found answers to all the questions that you have in your mind regarding this type of loan. Finding the best loan option for your financial needs can often be difficult. By giving you all the necessary details about this type of loan.