There are lots of understanding gaps on what a personal line of credit is, how does it work and how to get maximum advantage of the product. Let us look at correcting the perceptions, ideas and theories about this product.
Defining personal line of credit
The personal line of credit can be defined as a loan where the borrower is required to pay interest only on the amount that is utilized. The beauty of the product is that the banks assign a limit which is accessible to the borrower at any point of time. However, the actual utilization from the provided limit is what the borrower gets charged for.
How is it different from other credit facilities?
The regular loan products have a fixed equated monthly installment that needs to be paid on a fixed day of the month. The line of credit on the other hand does not have any fixed amount to be paid and can be paid at any point of time. Let us understand this better with an example. You have been extended a line of 1 lakh. You utilize it for 15,000 Rs on 1st day of the month. On 7th day of the same month you get funds. Now you can decide to either pay in full or part or maybe utilize the received funds for some other purpose. If you pay in full the interest will get levied for only 7 days. If you part pay, 7 day interest will be charged on the amount paid on 7th and the balance amount would attract interest for incremental days as well till it is paid in full.
Can Credit Cards be termed as line of credit?
To keep the answer simple, credit cards can be termed as personal line of credit since the extended benefits are similar. As against a cheque that can be issued from the line of credit, a draft can be requested from the bank if desired.
Benefits of line of credit
Drawbacks of the line of credit
When should one apply?
One can apply for a line of credit when there are irregular income patterns. In such cases this product keeps one afloat even in a situation when the funds get delayed. One can also apply for a personal line of credit if there is a need that may need funds over a period of time. Like building a house where all funds may not be required in one go. One can also seek this product if one does not have adequate contingency fund. The annual fee will be a small charge that would need to be borne.
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