Everything you need to know about the Line of Credit
Mohan, a salaried employee from Mumbai, wanted to apply for a personal loan. But the monthly repayment of principal and interest rate on personal loans was a bit of a problem for him. He did not have enough savings to repay both. Suddenly, his mother was hospitalised. He needed funds for her surgery. He was in a dilemma and did not know what to do. Then he came to know about a loan facility called a ‘Line of Credit’. Upon detailed research, he found it to be the perfect solution. He could get the necessary funds. He would have to pay only the interest on his borrowings every month. He could pay off the actual loan in one go, after a specified period. His fixed deposit was maturing after some months. He could avail the personal line of credit, and pay it off once his fixed deposit matures. It was an easy solution.
What is a line of credit?
A line of credit is a credit facility allowed to individuals for a specified amount. The borrower can withdraw and use any amount within that allowed level. You only have to pay interest on the amount you withdraw. This interest is payable every month. The total amount withdrawn has to be repaid at the end of the chosen tenure of the facility.
Mohan was allowed a personal line of credit for up to Rs 2 lakh, for 10 months. For the surgery, he withdrew Rs 75,000 at once. He paid interest on this Rs 75,000 every month. After three months, he withdrew another Rs 25,000. The total amounted to Rs 1 lakh. Now, Mohan paid interest on Rs 1 lakh every month. After the end of his 10-month tenure, he was to pay back Rs 1 lakh.
What are the benefits of a line of credit?
- Lower interest: Under this facility, interest is payable only on the amount withdrawn. Thus, the amount you pay as interest is low.
- Lower instalment payments: You need to pay only the monthly interest every month. The actual amount borrowed is repaid at the end of the tenure of the facility. Thus, the monthly instalments are lower.
- Flexibility: Borrowers can withdraw any amount up to the limit extended. You can take the money as and when you want. Such withdrawals are free of charge. Moreover, the borrower can also partly prepay the loan anytime within the tenure. There is no penalty for prepayment. You can also choose to convert it into a term loan.
- No collaterals required: This is an unsecured loan, and requires no collateral.
How to apply for a line of credit?
You can apply online for a personal line of credit. You need to have a steady source of income. To avail a line of credit, you have to submit certain documents. These documents include identity proof, address proof, and income proof of the borrower.
Mohan availed a personal line of credit instead of a personal loan. The facility saved him money. It also enabled him to meet his urgent expenses. A convenient facility, indeed!