Line of Credit

What is a line of credit?

A line of credit is a preset advance that you can use any time you need it. You can access this money as needed and ‘on-demand’ to fulfil your emergency needs like home renovations, vehicle repair, medical emergency etc.

Lenders offer you a line of credit if you meet certain eligibility criteria. When you borrow from the credit line, you are liable to pay interest on your borrowed sum of money. As already mentioned, there is a borrowing limit to this credit line and you can take out money from the credit line only until this limit is reached. As you repay this borrowed money along with the interest, you can again tap on this credit line to meet other financial needs.

Flexibility is a crucial parameter of this lending instrument as it allows you to decide when to borrow money and repay it. You can also repeat it any number of times as long as you abide by the rules, which include making all required repayments on time.

How does a line of credit work?

When it comes to borrowing money, you have the option of applying for a loan or tapping a line of credit. With a loan, irrespective of when you utilize the money, you receive a lump sum amount into your account and you must begin repayments immediately from the next month.

A line of credit, on the other hand, provides you with access to a predetermined amount of funds that you may avail only when necessary. You'll have a predetermined period known as the "draw period" in which you can withdraw the funds from the account after being approved for the line of credit.

As soon as you tap into your credit line, interest starts to accumulate, and you'll need to start paying at least the minimum amount due. As you make payments, the sum will be deducted from your borrowed amount and is added back to the line of credit for further borrowings. But as soon as your draw period is through, you'll enter into the repayment period, where you'll have to pay off any outstanding loan within a specified time.

Types of the line of credit

Personal Line of Credit

This enables you to borrow, payback, and borrow again unsecured loans. An unblemished credit history, a high credit score, and a steady income are necessary to open a personal LOC.

Credit line for a home equity

The market value of a house less the amount due, which serves as the foundation for figuring out the size of the LOC, serves as security for a Credit line for home equity. The credit limit is often equivalent to 75% or 80% of the home's market value, less the mortgage balance outstanding.

Commercial Line of Credit

Instead of getting a fixed loan, businesses utilize these to borrow money as needed. The financial institution providing the LOC assesses the company's market worth, profitability, and level of risk before issuing a LOC.

Line of Credit on Demand

This type can be secured or unsecured. With a demand LOC, the lending institution has the right to demand repayment at any time. Depending on the LOC's terms, repayment up until the loan is called may be either interest-only or interest plus principal. The credit limit may be used by the borrower at any moment.