Every Month at the end of month most of us face the cash crunches and its an inescapable situation for many. But, coming to the fact- you can’t multiply your income overnight, and even following money management skills takes years to reflect it in your bank account.
So What could be the solution to your short-term cash crunches? Can it be borrowing from your friends and family or going for a personal loan from the bank ?
Personal Line of Credit
A line of credit is a type of borrowing only where the borrowed amount can be used as a credit card. While opting for a personal line of credit one is free to withdraw the credit as per his/her needs without any restriction.
When one opts for a line of credit they get a particular amount sanctioned on their name, from which one is free to withdraw money as per their requirement. The interest rates on lines of credit are generally lower than personal loans and credit cards. Moreover, the interest is charged only on the amount used. All these features make the line of credit more convenient and affordable for users. From paying bills or adding some cash to your monthly budget a line of credit can be used for multiple purposes.
? Both of these will not work here as no one can lend you money several times and availing a personal loan whenever you need money is not possible. Then what can be the solution to this?
Why Choose Line of Credit?
- A personal line of credit allows you to withdraw money anytime you want from the money sanctioned to you.
- Interest is charged only on the amount used which reduces your EMI burden.
- The interest rate for a personal line of credit is comparatively low as compared to the interest rate of an online personal loan.
- A line of credit offers flexibility to users which is its main advantage.
How does a Line of Credit Functions?
When someone opts for a line of credit, he/she gets a certain amount in their LOC account, but unlike loans, they do not have to use it all at once. The borrower is free to tailor their spending from the LOC to their needs. Moreover, what makes LOC even more attractive to the customers is- the borrower owes interest only on the amount they draw, not on the entire credit line. Additionally, borrowers can adjust their repayment amounts as needed, based on their cash flow and affordability.
Personal Line of Credit Repayment Structures
Due to the variety of repayment structures in the market, borrowers should be wary of the unique terms associated with their loan. The majority of personal lines of credit will function like a credit card, as outlined above. However, other repayment terms exist, and may have cumbersome provisions associated with them. We’ve identified some less common forms of repayment below:
Draw and repayment periods: In some instances, personal lines of credit can feature separate draw and repayment periods; allowing the borrower to withdraw funds during the draw period, while requiring them to make monthly payments during the repayment period.
Balloon payment: A personal line of credit may require payment of the entire balance at the end of the term, otherwise known as a balloon payment. Balloon payments come with the added need to refinance if the borrower is unable to repay the full amount.
Demand line of credit: In rare cases, banks may offer a “demand line of credit,” which functions similarly to a standard line of credit, but gives the lender the right to call the loan for repayment at any time.
Typical Rates, Fees and Terms
Based on our review of the terms offered by some of the lending institutions, we’ve included a list of commonly offered rates, terms, and fees for personal lines of credit:
Average Interest Rates
Variable (based on Prime Rate), generally 9.30% – 17.55%
|Term Range||6 months – 5 years or flexible|
|Credit Limit Range||$1,000 – $100,000|
Pros and Cons of Personal Line of Credit
The main advantage of the personal line of credit is its flexibility; funds can be drawn and paid off repeatedly. This is a major advantage over more traditional fixed-term personal loans, which are paid out in one lump sum. There are also less restrictions on what a personal line of credit may be used for, unlike mortgages and auto loans.
Personal lines of credit, like credit cards and other forms of revolving credit, may negatively impact your credit score if you run up a high balance—usually around 30% or more of your established line of credit limit. While a personal line of credit might be an attractive option, there are situations for which a personal loan or credit card might be better suited.
The application process for LOC is very simple and straightforward. A borrower can visit the nearest bank and apply for it by furnishing the required documents. The bank then checks the borrower’s credit score and monthly income before granting the loan request. The total credit amount and the rate of interest are decided based on the credit score, monthly income, and collateral or security offered by the borrower.
In the current pandemic situation where the majority of people are going through an economic crisis, opting for a line of credit can be one of the solutions to fulfil their financial needs and survive in this difficult time.