Credit Line Card and Loan – Line of Credit (LOC) is a predetermined borrowing limit that can be tapped at any time. The borrower can withdraw the money as per his requirement till the maximum limit is reached and when the money is repaid, it can be borrowed again in case of an open LOC. An LOC is an arrangement between a financial institution—usually a bank—and a customer that establishes the maximum loan amount that the customer can borrow. The borrower can avail the facility of funds from the LoC at any time as long as they do not exceed the maximum amount (or credit limit) stipulated in the agreement. LOC is a pre-determined borrowing limit which can be availed by the borrower at any time.
Types of credit lines include personal, business, home equity, etc. LoC has inherent flexibility which is its main advantage. Potential disadvantages include higher interest rates, harsher monetary penalties for late payments, and the possibility of higher expenses.
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Credit line facility through credit card
The interest rate in credit lines is generally lower than the interest rate paid in credit cards. One can also avail Line of Credit and get the amount in their credit card as well. Some banks/companies also provide credit line facility through credit cards. It can be used for cash withdrawal at ATMs, swiped at POS to do offline transactions or can be used for online transactions. Also know – Lowest Credit Card Interest Rate in India – 2022
Understanding Credit Lines
All LOCs are created out of a predetermined amount of money that can be borrowed, paid off and re-borrowed as and when required. The amount of interest, the size of the payment and other terms are determined by the lender. Some credit lines allow you to write a check (draft) while others involve a type of credit or debit card. LOCs can be secured (by collateral) or unsecured wherein unsecured LOCs are generally subject to higher interest rates. LoC has inherent flexibility which is its main advantage. The borrower can request a specific amount but they do not have to utilize the entire amount. Instead, they can determine their expenditure from the LoC as per their requirement and they will have to pay interest only on the amount drawn and not on the entire credit line.
Similarity – Credit line loan and overdraft
There are many similarities between credit line loans and overdraft facilities. Both the options come with a pre-sanctioned credit limit, wherein the borrower can avail the loan multiple times during the sanctioned period. Both these facilities allow borrowers to make payments as per their repayment capacity without any prepayment charges.
Credit Line Card and Loan Repayment option
OD and line of credit makes repayment options attractive. “As far as the interest cost is concerned, borrowers accrue interest on the amount borrowed (not the sanctioned amount) till it is repaid,” explains Agarwal. However, Agarwal said that in case of some credit lines, borrowers need to repay as EMI, which includes both principal and interest components.
Overdraft facility is generally provided by banks to their current account holders like businessmen, corporates and SMEs. Recently, many fintech companies have started providing credit line facility to individuals as well. Fintech companies offer secured as well as unsecured lines of credit. Unsecured credit lines are usually given to salaried applicants on the basis of their credit score and monthly salary.
Higher interest rates than personal loan
Evaluate the need and the time period for which you need the money before availing the credit line. You can get a personal loan at a low cost. Credit line facilities usually have higher interest rates than personal loans.
On choosing a personal loan, overdraft or line of credit, Agarwal says, “The high repayment flexibility offered through credit line facilities makes them more suitable for those facing frequent cash flow mismatches. However, such consumers can also consider overdraft facilities offered by banks through their savings, current or salary accounts, if they charge lesser interest as compared to credit line facilities. They can also consider personal loans extended by certain banks/companies as overdraft facilities.
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