Everything You Need to Know About Personal Line of Credit

Found valuable equity that you’d like to invest in but lack the resources? Or have to pay bills from an unfortunate car accident? Be it an impromptu purchase or an unforeseen expense, every now and then instances come up where you might have found yourself wishing for an extra source of cash.

When taking a personal loan may seem far-fetched and paying credit card bills is out of the budget, getting a personal line credit is a right thing to do.

What is a personal line of credit? How is it better than a personal loan? Are the repayable interest rates better? Find answers to all these questions and more in this article.

What is a Personal Line of Credit?

A personal line of credit is a type of credit source that is extended to individuals by a bank, NBFCs, or a fintech lending platform like MoneyTap.

It provides you with a maximum credit limit from which you can borrow amounts, lower or equal to the credit limit, as and when the need arises.

The borrowing limits, repayment interest rates, minimum monthly payment, the tenure are all decided while establishing the line of credit with your bank/lending institution.

A personal line of credit can be a useful tool when you need to borrow money incrementally. It also comes in handy in cases where you need additional funds but have to maintain a minimum balance in your account.

The ease of access and the minimum payment requirements make this kind of credit source highly preferable among a majority of the working population of today.

How Does a Personal Line of Credit Work?

While your lender will approve a particular sum of money, you need not withdraw the entire amount immediately, unlike a loan. But instead, you have the freedom to access the funds over a period of time, as and when you need them by simply transferring them to your bank account.

Another feature of the line of credit is that you only have to pay interest on the amount you actually use and not the amount set as your credit limit.

This significantly reduces the repayable amount. The line of credit may also have an annual service fee and that is payable regardless of whether you use the funds or not as far as the account is open.

Who Can Avail Such a Service?

Anyone with a strong credit history who can prove his/her ability to repay the borrowed amount can apply for a personal line of credit. In fact, the better your credit rating, the more likely you are to get a personal line of credit.

How Does a Personal Line of Credit Differ From Other Credit Sources?

• Line of Credit versus a Personal Loan

First and foremost, unlike a personal loan, a personal line of credit allows you to borrow only the amount you need and offers an interest rate that is generally lower than that of personal loans. And the repayment amounts are directly influenced by your outstanding balance.

• Line of Credit versus a Credit Card Cash Advance

While credit card cash advances are similar to personal lines of credit in terms of withdrawing only how much you need, credit card APRs are generally higher than those of lines of credit. But that’s not all, credit card cash advances may also come with extra fees, so if you are confused between both options, be sure to properly analyze the interest rates as well as the additional service fee and make a well-informed decision.

• Personal Line of Credit versus HELOC

If you are a homeowner, you are also eligible for a home equity line of credit (HELOC), where your property will be used as collateral. And since this is a secured line of credit, the interest rates on a HELOC will be generally lower than the personal line of credit.

However, this method takes your home as collateral and it puts the property at risk. If you cannot repay the HELOC, you can lose your house! Since the personal line of credit is unsecured, the worst that can happen is probably a large penalty for non-payment of the sum borrowed and a negative impact on the credit score.

Advantages of a Personal Line of Credit

1. Instant access to cash
2. Higher credit limit
3. Lower interest rates
4. Interest payable only on the amount withdrawn
5. Interest paid is tax-deductible
6. No restrictions or limitations on the usage of funds.
7. It provides an additional resource and helps you avoid dipping into your long-term savings accounts.

Repayment

Another factor to consider when deciding whether you should go for a personal line of credit as opposed to the various other loan options available is the repayment clause.

Most personal loans have a clear, straightforward repayment system where the borrower makes regular payments for a set repayment term.

In such arrangements, the monthly payments are set at the beginning of the loan where the balance and interest earned on the loan are calculated and divided over monthly payments to ensure complete repayment of the loan within the repayment period.

Payments for a line of credit, on the other hand, are not set up for paying off the credit within a certain timeframe, rather a minimum payment amount is set, depending on the outstanding balance.

As you can see, a personal line of credit not only increases your financial freedom but also works as a backup for multiple situations. An app-based personal credit line from MoneyTap is all you need to either fulfill your dream or meet an urgent financial obligation.

Author Bio:

Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit line. Shiv is a true finance geek, and his friends love that.

They always rely on him for advice on their investment choices, budgeting skills, personal financial matters and when they want to get a loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at [email protected].