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Unexpected expenses or short-term funding needs can sometimes disrupt personal or business finances. Taking a traditional loan may not always be the most convenient option, especially when you do not need the full amount at once. This is where a line of credit can be helpful.<\/p>\n\n\n\n
With a line of credit, a lender approves a certain loan limit for you. You can borrow money from this limit whenever you need it. You do not have to use the full amount at once. Interest is usually charged only on the amount you use. Both individuals and businesses can use a line of credit loan to handle short-term financial needs.<\/p>\n\n\n\n
In this blog, we will explain the line of credit meaning, how it works, its types, benefits, and when it may be useful. Keep reading.<\/p>\n\n\n\n
A line of credit is a flexible borrowing option offered by banks and financial institutions. It allows you to access funds up to a pre-approved credit limit. Instead of receiving the entire loan amount at once, you can withdraw money whenever it is needed.<\/p>\n\n\n\n
Interest is usually charged only on the amount that is actually used, not on the full approved limit. Once a portion of the borrowed amount is repaid, that limit becomes available again for future use. This is the basic difference between a line of credit and a traditional loan, where the entire amount is disbursed at once.<\/p>\n\n\n\n
A line of credit acts as a revolving credit facility. The lender approves a credit limit based on your income, credit history<\/a>, and financial profile. Once approved, you can withdraw money from this limit whenever required. Interest is charged only on the amount that is used. After repayment, the available limit increases again and can be reused.<\/p>\n\n\n\n Let\u2019s understand this with the help of a simple line of credit example. Suppose a lender has approved a credit limit of Rs. 10 lakh, and you have borrowed Rs. 1 lakh from it. Interest will be charged on Rs. 1 lakh, and not on the entire limit of Rs. 10 lakh. Once you repay the borrowed amount, the full Rs. 10 lakh limit becomes available again.<\/p>\n\n\n\n A line of credit loan can be secured or unsecured. If a borrower has pledged a property or asset as collateral, the loan is secured. Similarly, if no collateral is provided, the loan is unsecured. The table below depicts the basic difference between a secured and an unsecured line of credit:<\/p>\n\n\n\n <\/p>\n\n\n\n Here are a few points to consider when choosing between a secured and an unsecured line of credit:<\/p>\n\n\n\n A line of credit in India can either be revolving or non-revolving. The difference mainly lies in whether you can reuse the loan limit after repayment.<\/p>\n\n\n\n A revolving line of credit allows you to use funds, repay them, and borrow again within the approved limit. The credit limit gets restored after repayment.<\/p>\n\n\n\n A non-revolving line of credit works differently. Once the approved amount is used and repaid, the loan account typically closes. If more funds are required, you may need to apply for a new loan or credit facility.<\/p>\n\n\n\n Banks and financial institutions offer various types of line of credit facilities in India to cater to the diverse requirements of borrowers. Some options are designed for personal financial needs, while others help businesses manage daily operations and cash flow. Each type works slightly differently depending on the purpose, collateral, and repayment terms.<\/p>\n\n\n\n Here are the most common types of lines of credit in India:<\/p>\n\n\n\n A personal line of credit is designed to help individuals meet their short-term financial needs. You can use it for expenses such as medical emergencies, travel plans, education costs, or other urgent payments. The primary advantage of this type of line of credit is flexibility. You can withdraw funds as needed and then repay them when you have sufficient surplus cash.<\/p>\n\n\n\n A Home Equity Line of Credit (HELOC) is a secured credit facility where you can use the equity in your home as collateral. The lender provides a credit limit based on your property\u2019s value. You can use this credit limit to withdraw funds for purposes such as home renovation or debt consolidation. But there is a risk of losing your property if you fail to repay the borrowed amount.<\/p>\n\n\n\n A business line of credit helps companies and entrepreneurs manage short-term financial requirements. They often use it to manage working capital, procure inventory, or pay for day-to-day business expenses. Instead of taking a large loan at once, a line of credit allows businesses to withdraw smaller amounts as needed and repay them over time.<\/p>\n\n\n\n A demand line of credit gives lenders the right to ask for repayment at any time. While it offers flexible access to funds, borrowers should be cautious because the lender may demand full repayment without long notice. This type of credit facility is usually offered to borrowers with not-so-strong credit profiles.<\/p>\n\n\n\n A securities-backed line of credit allows you to pledge your financial assets as collateral. These may include shares, bonds, and mutual funds. The lender provides a credit limit based on the value of these investments. However, market fluctuations can affect the value of the pledged securities. As a result, the borrowing limit may also increase or decrease.<\/p>\n\n\n\n A line of credit offers multiple advantages compared to traditional loan options. These include:<\/p>\n\n\n\n Also Read –\u00a0\u00a0 Business line of credit explaine<\/a><\/p>\n\n\n\n The eligibility criteria for a line of credit may vary depending on the lender and the type of credit facility. Here are a few important factors that most lenders look at:<\/p>\n\n\n\n Applying for a line of credit makes sense in the following scenarios:<\/p>\n\n\n\n Also Read –\u00a0 Emergency Credit Line Guarantee Scheme<\/a><\/p>\n\n\n\nSecured vs unsecured line of credit: Key difference<\/strong><\/h2>\n\n\n\n
Parameter<\/td> Secured Line of Credit<\/td> Unsecured Line of Credit<\/td><\/tr> Collateral<\/td> Requires an asset such as property, deposits, or investments.<\/td> No collateral required.<\/td><\/tr> Risk<\/td> The lender\u2019s risk is reduced by the security.<\/td> Lender\u2019s risk is high.<\/td><\/tr> Interest rate<\/td> Interest rates are lower than an unsecured line of credit.<\/td> Interest rates are on the higher side.<\/td><\/tr> Eligibility<\/td> Lenders follow lenient eligibility norms.<\/td> Eligibility criteria are more stringent.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Important points to consider before choosing<\/strong><\/h2>\n\n\n\n
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Revolving and non-revolving credit lines explained<\/strong><\/h2>\n\n\n\n
Types of line of credit available in India<\/strong><\/h2>\n\n\n\n
Personal line of credit<\/strong><\/h3>\n\n\n\n
Home equity line of credit<\/strong><\/h3>\n\n\n\n
Business line of credit<\/strong><\/h3>\n\n\n\n
Demand line of credit<\/strong><\/h3>\n\n\n\n
Securities-backed line of credit<\/strong><\/h3>\n\n\n\n
Benefits of using a line of credit<\/strong><\/h2>\n\n\n\n
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Eligibility criteria for a line of credit<\/strong><\/h2>\n\n\n\n
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When should you consider a line of credit?<\/strong><\/h2>\n\n\n\n
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Line of credit vs term loans: What\u2019s the difference?<\/strong><\/h2>\n\n\n\n