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What is a Line of Credit

By Chanel Rick - Feb 17,2022
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You may be in the habit of managing your finances responsibly, complete with a stable budget and an expense tracker. However, unexpected expenses could easily torpedo your budget. These sudden expenses could be for home renovations, hospitalizations, weddings, or a loss in your business.

Regardless of how much money you put aside for emergencies, those funds could still fall short. But, there are many ways you could choose to remedy these financial woes. While some may suggest applying for a personal loan, experts believe that a Line of Credit will be more beneficial.

Line of Credit (LOC)

Simply put, a Line of Credit could be a secured or unsecured, ready source of income. Here the bank or NBFC will approve the entire amount, but you only need to pay interest on the amount you use. This provides you with a relatively large bandwidth to deal with those expenses. Especially if you need to make continuous payments or purchases.

Two main types of Line of Credit 

  1. Secured: Here the rate of interest is lower because the bank or NBFC will require some of your assets as collateral.
  2. Unsecured: The interest charged is higher than a secured LOC since there’s no collateral involved.

Benefits & Features of LOC

Take a look at the numerous benefits and features that you can indulge in with a Line of Credit.

Approval of High Loan Amounts 

Unlike most loans, Line of Credit sanctions a higher loan amount. Since it comes under business loans, MSMEs can avail of much-needed funds.

Interest Only on Amount Used   

You receive comparatively lower interest, unlike traditional loans. Interest must be paid only on the amount you use, thus reducing the burden of paying the EMI on the unused portion of the loan.

Flexible Fund Availability 

You can easily fulfil your financial requirements with a Line of Credit, by accessing the funds at regular intervals. This means you can borrow and repay as many times as you need. With the flexible repayment structure, these funds will be available whenever you need them.

No Extra Charges 

There are no hidden charges imposed on the amount borrowed, total loan amount or unused credit. With this additional layer of transparency, you can easily go ahead with a Line of Credit loan without worrying about extra charges.

Smooth Cash Flows for MSMEs

It’s important for businesses to promote growth by adapting to a constantly developing market and consumer base. To keep up with these changes, MSMEs can avail of Line of Credit for smooth cash flow.

Boost Your Creditworthiness 

You can maintain a good credit score with regular repayments and keep a low balance. This will improve your credit score, elevating your or your business’s creditworthiness.

Applying for a Line of Credit is a feasible option for personal or business use. However, like most loans, there are a few key eligibility criteria you need to qualify for before applying.

  1. You need to have a good and consistent credit score.
  2. The bank or NBC will assess your ability to repay the loan.
  3. It’s important to have a significant amount of business tenure or experience.
  4. You must provide valid certificates and documents.
  5. Your financial history needs to reflect a steady income.
  6. Businesses need to show persistent profitability.

How to Apply?

Once you pass the eligibility criteria you can seek out a bank or NBFC, and apply for a Line of Credit. You need to provide them with all the necessary documents, post which they will verify your credit score. After assessing your credit history and income per month, the loan will be approved.

Next time you have a financial impediment, just apply for a secure or unsecured Line of Credit!

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