Whether you own a business and need cash or you’re an individual facing unexpected expenses, a Line of Credit (LOC) can really help. But what is a Line of Credit, and how does it work? Let’s break it down.
A Line of Credit is a flexible loan from banks that allows you to borrow money up to a set limit. Unlike a regular loan, where you get a fixed amount and pay it back in set payments, a Line of Credit allows you to take out money as needed and you only pay interest on the amount you use.
Pre-approved Credit Limit: You’re given a fixed limit of how much you can borrow.
Pay Interest Only on What You Use: If you don’t use the entire credit limit, you won’t have to pay interest on the full amount.
Revolving Credit: Once you repay the amount, your credit limit is restored, and you can borrow again.
Flexible Repayment: You have the flexibility to make payments at your convenience, although banks may set minimum monthly payments.
In a traditional loan, you receive a fixed amount of money that you must pay back with interest over a set time. With a Line of Credit, you borrow money as you need it, and you only pay interest on the amount you use.
Example: If you have a Line of Credit of ₹5 lakhs and you only use ₹1 lakh, you'll pay interest on ₹1 lakh, not the full ₹5 lakhs.
There are several types of LOCs available, depending on the purpose and the borrower’s profile. Let’s explore the most common types.
A Personal Line of Credit (PLOC) is offered to individuals based on their credit score. It’s a great option for handling personal expenses like medical emergencies, weddings, home repairs, or travel.
Interest Rates: Generally lower than credit cards but higher than secured loans.
Eligibility: Based on income, CIBIL score, and credit history.
Example: Amit has a Personal Line of Credit of ₹3 lakhs. He needs ₹50,000 to cover emergency medical expenses. He withdraws ₹50,000 from his LOC, and only pays interest on this amount. After repaying, his available limit goes back to ₹3 lakhs.
A Business Line of Credit (BLOC) is meant for businesses that need money for everyday costs, buying inventory, expanding, or covering cash flow gaps.
Interest Rates: Vary based on the business profile and revenue.
Secured or Unsecured: Businesses can opt for either a secured (backed by collateral) or unsecured LOC.
Example: A local restaurant owner uses a Business Line of Credit to purchase extra inventory before a busy festival season. After the season ends and sales increase, they repay the LOC and can reuse the credit later.
A Home Equity Line of Credit is a secured loan where you borrow against the value of your home. It’s often used for big expenses like home renovations, education costs, or debt consolidation.
Interest Rates: Lower because the credit is secured by your property.
Eligibility: Depends on the value of your home and the outstanding mortgage.
Example: Rajiv needs ₹7 lakhs for home renovations. Since his house is worth ₹40 lakhs and he has paid off ₹25 lakhs of his mortgage, he can take a HELOC to fund the renovation at a lower interest rate.
This is usually offered with a bank account where the bank allows you to withdraw more than what you have in your account. You’ll be charged interest on the overdraft amount.
Interest Rates: Varies by bank, usually higher than other LOCs.
Eligibility: Available to account holders with a good relationship with the bank.
Applying for a Line of Credit is similar to applying for any other loan, but with more flexibility. Here’s a step-by-step guide:
Before applying, you should check your CIBIL score. A high score (usually 750 and above) increases your chances of getting approved for a Line of Credit with favorable terms.
Different banks and NBFCs offer Lines of Credit with varying interest rates, fees, and terms. Compare the offerings from:
Public sector banks (e.g., SBI, PNB)
Private banks (e.g., HDFC, ICICI)
NBFCs (e.g., Bajaj Finserv, Tata Capital)
Once you’ve selected a lender, you can apply online or visit a branch. You’ll need to provide documentation such as:
Identity proof (Aadhaar, PAN card)
Address proof
Income proof (salary slips, bank statements)
Business proof (for BLOC)
Step 4: Approval and Setting the Credit Limit
The bank will check your credit score and ability to repay before approving your Line of Credit and setting a credit limit. If you're getting a secured Line of Credit (like a HELOC), they will also look at the value of the asset, such as your home.
Once approved, you can access the funds through an ATM, online banking, or by writing checks (for some types of Lines of Credit). You only pay interest on the amount you take out.
| Pros | Cons |
|---|---|
| Flexible borrowing: Withdraw only what you need | Higher interest rates compared to secured loans |
| Pay interest only on the used amount | May affect credit score if repayments are missed |
| Reusable credit: Credit limit is restored upon repayment | Annual maintenance fees may apply |
| No need for lump-sum borrowing | Temptation to overspend because of easy access |
| Quick access to funds in emergencies | Variable interest rates can fluctuate over time |
A Line of Credit can be a great financial tool for individuals and businesses that need easy access to money. However, it’s important to know that LOCs are better for short-term needs rather than long-term debt.
Emergency funds: LOCs are great for unexpected expenses, such as medical emergencies, car repairs, or urgent home maintenance.
Managing cash flow: Small businesses can use LOCs to cover gaps in cash flow without taking a full loan.
Home improvement: A HELOC can be useful for financing home renovations at a lower interest rate.
Educational expenses: Use LOCs to cover unexpected fees or other educational costs without taking an education loan.
Long-term borrowing: If you need financing for more than a few years, a personal loan or a business loan with fixed installments might be a better option.
Overspending habits: If you tend to overspend, the easy access to funds through a LOC might lead you into debt.
A Line of Credit can be a helpful financial tool for people and businesses that need easy access to money. It’s important to know the different types—like Personal, Business, and Home Equity Lines of Credit—and their pros and cons to make smart choices. LOCs let you borrow only what you need and pay interest only on that amount, but they can also have high interest rates and the risk of overspending. By thinking carefully about your financial needs and habits, you can decide if a Line of Credit is right for you, helping you manage costs and take advantage of opportunities.
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A Line of Credit is a flexible loan that allows you to borrow money up to a certain limit, only paying interest on the amount you use.
The main types include Personal Lines of Credit (PLOC), Business Lines of Credit (BLOC), and Home Equity Lines of Credit (HELOC).
Advantages include flexibility in borrowing, only paying interest on what you use, and the ability to access funds quickly for emergencies or unexpected expenses.
Yes, potential downsides include high interest rates, the risk of overspending, and fees associated with maintaining the account.
Your credit limit is based on your creditworthiness, income, and, for secured lines, the value of the asset used as collateral.
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