A credit line works in the same way that a credit card does, with a few minor differences. By definition, a credit line is a loan that borrowers can take out, as and when needed, up to a predefined limit. Borrowers are expected to make regular repayments on a credit line, and the principal amount that has been repaid can be borrowed once again without any additional procedures.
How Is A Credit Line Different Compared To A Personal Loan?
There are a number of differences between a credit line and a personal loan. The amount disbursed as part of a personal loan, once it has been approved, is deposited entirely into the borrower’s bank account. In contrast, no amount is deposited into the borrower’s personal bank account once a credit line has been approved. Instead, the bank approves a credit limit for the borrower, and these funds can be used as needed.
Also, borrowers are charged interest on only the amount that has actually been used from a credit line, whereas borrowers of personal loans have to bear interest on the entire loan amount, irrespective of the loan amount that has been used.
Since borrowers don’t require any further approvals from the lender to use a credit line once it has been allocated, they can choose to withdraw funds (up to the predefined limit) whenever required. This can be especially helpful during emergencies as funds are urgently required, or to make up for an income deficit at month-end.
Tip: Those suffering from a consistent income shortage every month may find a credit line especially useful.
Why Not Go For A Personal Loan?
If the goal is to borrow a large amount, all at once, to purchase an expensive asset or cover a big one-time expense, then a personal loan may be a better option compared to a credit line. However, if funds are required piecemeal, such as to cover residual expenses at the end of each month or for a major expense that needs to be paid in installments, then a credit line is suitable.
How Does a Credit Line Work?
A credit line is not very different compared to a credit card. Borrowers are assigned a prespecified limit up to which they can borrow at their own discretion. However, this limit is much higher for a credit line than a credit card, making credit lines better suited for larger expenses. Also, the applicable rates are usually lower on credit lines compared to credit cards.
Credit lines don’t require the submission of any additional credit documents before each withdrawal. Funds are readily available up to the prespecified limit. Charges are levied only on the amount that has been withdrawn and remains withdrawn. Some financial service providers also give the added flexibility of linking credit lines to the borrower’s debit card, providing easier access to approved funds.
Which Credit Line Option Is Right For You?
The following factors should be considered when you are evaluating different credit line options:
- Applicable rates
The applicable interest rate might not be the same among all credit line providers, so borrowers should choose a rate that is the lowest. Also, it is important to ensure the rate is only applied to withdrawn funds and not on the total credit limit. Some lenders might be willing to offer lower rates is the borrower is willing to secure the credit line against an asset.
- Associated fees
Lenders might advertise no annual fees, however, there might be a few additional fees, such as a monthly fee or an establishment fee. These can significantly increase the total cost of the credit line.
- Terms of repayment
Credit lines come in two types. The first is a term-plan credit line which sets a deadline by which the total approved limit must be repaid, which normally spans between 1 to 5 years. The second type is a flexible one, called a revolving credit line, allowing borrowers to keep the credit line indefinitely as long as the monthly payments are being made on time. The second option is more suitable for borrowers looking for a stable source of funds in case of emergencies.
- Accessibility of funds
Some lenders allow credit lines to be used only via cheque, while others give a debit card allowing borrowers to withdraw funds, whenever needed, through an ATM machine. The debit card option might carry additional fees, so make sure to check them before opting for such services.
Tip: Borrowers should make a comparison of all application fees before finalizing a lender. A loan finding service like Viva Paydays can help evaluate all costs associated with a loan.
The following pros are associated with a credit line:
- Charges are applied to only the amount that has been withdrawn
- Funds are easily and readily accessible
- The terms of repayment are flexible.
The following cons may arise from using a credit line:
- Some credit lines may have hidden fees and charges that can make them an expensive form of credit.
There are also potential risks that borrowers must remain aware of before applying for and using a credit line.
The first risk is overspending. Since a large amount of credit is readily available at the borrower’s disposal, they may incur unnecessary expenditures by using this credit. This can worsen the borrower’s financial situation in the long run and make it difficult to make timely repayments on the credit line.
The second risk is of incurring penalties. Some credit line providers may incur heavy penalties in case the borrower fails to make monthly repayments on the stipulated due date.
How To Apply For A Credit Line?
The first step towards applying for a credit line is to select a suitable lender based upon the abovementioned criteria. Then, it is important to ascertain that you meet the eligibility criteria as specified by the lender. Usually, lenders would require applicants to provide the following information to file a credit line application.
- Proof of income – this can include payslips and/or bank statements for the past few months.
- Information pertaining to all outstanding liabilities
- A valid photo ID
- Information about all assets held by the borrower, including houses, vehicles, and any savings accounts.
What is the difference between a credit line and a credit card?
There are a few differences, mainly that a credit line usually has a higher limit and must be completely repaid at the end of its term.
Do only banks offer a credit line?
Credit lines are typically offered by large financial institutions, such as banks.
How long does it take to get approved for a credit line?
It may take anywhere between 1-4 weeks for your bank to approve a line of credit.
Do I need a good credit score to apply for a credit line?
Yes, a line of credit is offered to customers with a good credit score.